Re: investing with multiples of net-nets. And regarding book value.
From the discussion here, I can't determine what would be a good buy point for a multiple net-net stock or the sell point, or what the holding period might be for such purchases; there's no empirical evidence presented. Imo, what is shown is another method, but it's not value investing.
Several successful value investors who've provided historical data on what works in investing believe book value is a significant metric. That would be Dreman, O' Shaughnessy, Tweedy Browne, maybe Graham.
If a company makes money, and does so most years, then there are only three things that can happen to that money: money gets returned to shareholders in the form of dividends, money is kept in the business (in the form of assets as the business pays down debt or uses the money to acquire more assets), or money is expensed (like paid out in big bonuses to managers). Tracking book value over a period of years is an indication how value is kept and built up in the business - whether that value is capital assets, inventory, intangibles. Knowing what the book value of a company is, how that book value is growing, and how current and past stock prices relate to current and past book value, that all provides a reference point on the continuum of the company's undervalued to overvalued extreme.
It seems to me a couple of things are going on here:
One is the argument that since "I stand alone" and no one's "on hand for the crisis times and none will take responsibility for my losses", it seems then the conclusion is "Therefore I will do just what seems right for me and I will have no one to blame but myself." My opinion is that Graham and Buffett do stand by the the investor, and their methods either prevent the investor from getting into a crisis or minimize the extent of that crisis (Graham's preference for diversification).
Secondly, given the access to database sorts, we all have the ability to screen for many variables. It seems to me the multiple net-net tactic is a result of looking at the basic net-net strategy and concluding there either aren't currently enough stocks that reside therein and/or the stocks that are there look like cigar butts. If we just open up the criterion (go to multiples of net-net, and we can experiment with this so easily), we can garner a wider swath of possibilities. My guess is that Dr. Graham - and imo, Graham's legit to bring up on this thread - would say, after giving a Jim Clarke-type response, that he would want to see a back test of the multiple net metric and also compare it with other metrics (For example FNDT and CLTK, presumably attractive and selected as multiple of net-net purchase, might more readily be chosen because of attractiveness to price/sales or price/earnings).
I would guess Dr. Graham would say about the stocks available currently in the classic net-net screen, that if the number is few and they are all small cap cigar butts, that that might be a good sign to just stay away from the net-net approach until Mr. Market provides better opportunities. And, Dr. Graham might add, Mr. Market for 50 or more years has, and likely will again, provide those opportunities.
jmo,
Paul Senior |
