Investing in net nets was my bread and butter back in 2008-2010.
I call it the glory days.
Everything was so darn cheap, it was like taking candy from a baby. Not that I would know.
The glory days are long gone and I eagerly wait for the next.
I love net nets because they are easy to invest. It’s an objective approach to investing. You don’t have to think about a narrative or future earnings power. Barely have to do any complex valuation or what if analysis like what we do with EBIT multiples valuation.
Focus on strong balance sheets, low cash burn rates, somewhat decent management and trust that the sentiment will go from pessimistic to average. I listed 7 things to look at when analyzing a net net.
Then buy a basket of the “safest” and walk away.
The US net net arena has dried up like sour anchovies – but there are always net nets lurking around.
But what I want to cover here is to use net nets as a way of gauging market sentiment.
Note that I say sentiment and not market valuation. Market valuation is useful when used correctly, but rarely is.
On the other hand, sentiment is broader but helps you see the forest.
First, let’s put net nets into perspective.
The Net Net Report
Back in 1986, Henry R. Oppenheimer wrote a paper titled Ben Graham’s Net Current Asset Values: A Performance Update.
Excellent paper.
The paper studied the number of net nets that existed from 1970 to 1982 and its performance. The main objective of Oppenheimer was to see how NCAV stocks performed. To verify whether Ben Graham was telling the truth.
(Net Current Asset Value is defined as Total Current Assets minus Total Liabilities)
The stocks used for testing and performance were based on those that met the core Graham criteria of being priced below 2/3 of NCAV. NCAV is a very conservative measure even back then, today, it’s even more stringent.
Historical performance isn’t what I’m interested in because I know that NCAV stocks beat the market, but I have included it to provide a bigger picture.
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