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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Shane M who wrote (4079)	5/13/1998 9:17:00 PM
From: James Clarke	Respond to of 78524

Thanks a million. My computer is scared of what I'm about to do to it. I'll be back to you. I've got a CEO coming in tomorrow morning but he may see me on no sleep. JJC

To: Shane M who wrote (4079)	5/16/1998 11:14:00 AM
From: Paul Senior	Respond to of 78524

Shane: re your net-net post here. Thanks for posting candidates and performance record. Very helpful and IMO much closer to what Graham has espoused. I thought I recall that Graham looked at these net-nets solely through the balance sheet, so that in his rules, it wasn't necessary that the companies be profitable. However, in reviewing my Intelligent Investor ('74 edit.)after reading your post, I see that for the the defensive investor in net-nets, he does say the companies should not have a deficit. For most periods in which he invested in net-nets,I think there were so many candidates that this was a reasonable condition. (Yet I do think he changed his profitablity rules later on; I'll have to relook deeper in my Graham materials if I get time.) Anyway, I do own a couple of the net-nets you mentioned. I'll go through your list to try to get more I could be comfortable with. And here I believe I arrive at the same dilemma as others on the thread --as regards Graham's net-net methods. Because - per Graham's way - it's not a matter of comfort, or of looking at co. business prospects, or of trying to pick the best from among the screen sample --- it's a matter only of holding a large enough diverse quantity of these things, and then playing a percentage game with them (some will work out okay, others will not). And as you are showing us, there may indeed still be enough companies with which to play net-nets, and the method is working. But man, it's a very, very tough mechanical way to invest. Surprisingly so, if you've never tried it. Maybe that's why many of us - perhaps all of us - try to make it more comfortable by trying to whittle down the list to a select very few potentials. Paul.

To: Shane M who wrote (4079)	5/16/1998 12:41:00 PM
From: Michael Burry	Read Replies (5) \| Respond to of 78524

Jim and I regularly cruise for decent net net opportunities and I was somewhat surprised to see such an extensive list of not only net nets but profitable ones. Recognizing many in the list immediately, I concluded that there are two major problems here: 1) the data for the screen is faulty 2) the list confuses the difference between a net net and a net net buy, i.e. there has to be a margin of safety in the discount to net net value ( Graham wanted a 33% discount at least). I went through the first bunch of companies you listed - by going through the SEC filings- and came up with the following ratios (market cap/net net). ACMM 1.0 ASFN 0.97 VOX 0.90 CSTL 1.66 CHRB 1.70 CRAN 0.92 EDIN 0.94 ESP 1.10 HBW 0.95 IDG 2.07 I stopped at this point, though I may go through the rest of the list when I have more time. It is obvious that these are not at all "profitable net net buys" a la HYDEA, JBM, or PSO. These three had ratios < 0.70 at the time they were discussed, thereby providing a decent expected return of near 50%. The best ratio in the bunch - 0.9 - only provides an expected return of 11% - not a significant margin of safety IMO. Moreover, VOX and ESP among several others seem to be actively collapsing, with sales shortfalls greater than 30% and recent ventures into negative income. I have commented in the past that I can take a list of 15 net nets down to 1 or none in about 30 minutes with SEC Edgar. This is not because I am seeking the best ones, but because I am simply seeking true net nets at 2/3 of net net value, as Graham advocated. To do this, I don't even look at the income statement or the business they are in. If I find one, then I will look at the other aspects, but I rarely take this next step because 2/3 net nets a la Graham just are not out there in any great quantity. Screens have inherent limitations - even the best ones. Historical testing of the net net hypothesis should recognize the problems in the data and the potential pitfalls in not recognizing the 2/3 criteria for a buy. Good Investing, Mike