Net Net Stocks: What Should You Do When There Is Nothing To DO?

I recently read an interesting question posted by Jae Jun of Old School Value. Jae asked his readers what they do when there is nothing to buy. After a bit of thinking, the answer hit quite hard.

The classic value investing problem is that when the market advances well among rational levels of value, value stocks themselves become scarce. It's hard to find cheap stocks -- low PE, low price to book, or even net net stocks -- when the stock market is reaching new heights.

Current Value Stocks -- Where Are They?

Apparently, this is one of those periods. Current value stocks are tough to find and what's out there in the American markets is generally low quality. As a net net stock investor, the same is true in our universe of stocks as well. Gone are the great net net stocks of even just 2 or three years ago -- net net stocks that would trade even below their net cash per share position. Gone are the net net stocks that were large enough for moderately large investors -- investors with portfolios between $1-10 million -- to purchase. These days, the market just isn't providing massively discounted stocks like it did only a few years ago.

This is where true character comes into play. Most investors -- value investors or otherwise -- abandon their strategy and get in with what the herd is doing. They start doing dumb things like buying home builders or internet stocks that have rocketing up in price. They start looking for promising IPOs, joining the frenzy of the pack when something glittery is released. Even long time value investors start to question their own strategy in the face of such massive returns that many other investors seem to be making... before it all comes crashing down and the frenzy turns into a fury of selling.

But in the meantime, what does the intelligent investor do as he waits patiently for exuberance to turn to panic? He learns.

Net Net Stock Investors Should Gather Information

When action grows unprofitable, gather information; when information grows unprofitable, sleep.

- Ursula LeGuin

The nice thing about investing is that all knowledge is cumulative. Information can be stocked away in the back of your brain like gold bars in a bank vault waiting for future use. As you grow your depth or breadth of knowledge you prepare yourself to capitalize on future opportunities that will inevitably present themselves.

It doesn't really matter if you know where you may use the particular knowledge in the future or not. Really, since the future is so unpredictable any number of opportunities may crop up that would allow you to take advantage of something you've read. Back in the mid-2000s I read a great shareholder letter written by Edward Lampert (who, at the time of writing this, may or may not have been hijacked by the intelligent investor's worst enemy). In the letter, Lampert described how a retail or restaurant location tends to grow in revenue over a number of years after the shop opens. Two years later I found myself in Glasgow working on a consultancy project through a university program and just happened to need a fairly accurate model of growth for a newly opened store.

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Other times it will be obvious what an investor should learn. Everybody comes to investing with their own strengths and weaknesses. Even a long way into an investment career, an investor still has strengths and weaknesses that help determine investment profits. If you acknowledge and improve on your weaknesses you'll open up more possible investment opportunities and keep from making costly mistakes.

Identify, Read, Grow, Repeat

So, what should a value investor learn?

Some market pundits say that an investor should learn accounting -- always accounting. Others advocate brushing up on modern finance or psychological theory. I don't think there's any one clear answer. As I mentioned, all investors have strengths and weaknesses. I like to call weaknesses "bottlenecks" since they are responsible for holding back investment profits. If you want to know what to read, or what to learn, then first identify where your weaknesses are and start improving on those. Another way to say that is to start learning what you need to learn next.

If you're new to net net stock investing, then the best thing you could possibly do is learn about the investment strategy. You can do that by picking up a volume of Security Analysis, Benjamin Graham's classic work, and memorizing everything inside of it. A much simper way to go would be to read everything you can here at Net Net Hunter so you can get a better understanding of how to add net net stocks in your own portfolio. For myself, I'm currently reading Benjamin Graham's 1951 ed. of Security Analysis for the 6th or 7th time and diving deeper into the Japanese investment climate.


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