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Posts Tagged ‘Liquidating Value’

The Fall 2010 edition of the Graham and Doddsville Newsletter, Columbia Business School‘s student-led investment newsletter co-sponsored by the Heilbrunn Center for Graham & Dodd Investing and the Columbia Investment Management Association, has a fascinating interview with Donald G. Smith. Smith, who volunteered for Benjamin Graham at UCLA, concentrates on the bottom decile of price to tangible book stocks and has compounded at 15.3% over 30 years:

G&D: Briefly describe the history of your firm and how you got started?

DS: Donald Smith & Co. was founded in 1980 and now has $3.6 billion under management. Over 30 years since inception our compounded annualized return is 15.3%. Over the last 10 years our annualized return is 12.1% versus −0.4% for the S&P 500.

Our investment philosophy goes back to when I was going to UCLA Law School and Benjamin Graham was teaching in the UCLA Business School. In one of his lectures he discussed a Drexel Firestone study which analyzed the performance of a portfolio of the lowest P/E third of the Dow Jones (which was the beginning of ―Dogs of the Dow 30). Graham wanted to update that study but he didn‘t have access to a database in those days, so he asked for volunteers to manually calculate the data. I was curious about this whole approach so I decided to volunteer. There was no question that this approach beat the market. However, doing the analysis, especially by hand, you could see some of the flaws in the P/E based approach. Based on the system you would buy Chrysler every time the earnings boomed and it was selling at only a 5x P/E, but the next year or two they would go into a down cycle, the P/E would expand and you were forced to sell it. So in effect, you were often buying high and selling low. So it dawned on me that P/E and earnings were too volatile to base an investment philosophy on. That‘s why I started playing with book value to develop a better investment approach based on a more stable metric.

G&D: There are plenty of studies suggesting that the lowest price to book stocks outperform. However, only 1/10 of 1% of all money managers focus on the lowest decile of price to book stocks. Why do you think that‘s so, and how do people ignore all of this evidence?

DS: They haven‘t totally ignored it. There are periods of time when quant funds, in particular, use this strategy. However a lot of the purely quant funds buying low price to book stocks have blown up, as was the case in the summer of 2007. Now not as many funds are using the approach. Low price to book stocks tend to be out-of-favor companies. Often their earnings are really depressed, and when earnings are going down and stock prices are going down, it‘s a tough sell.

G&D: Would you mind talking about how the composition of that bottom decile has changed over time? Is it typically composed of firms in particular out of favor industries or companies dealing with specific issues unique to them?

DS: The bulk is companies with specific issues unique to them, but often there is a sector theme. Back in the early 1980‘s small stocks were all the rage and big slow-growing companies were very depressed. At that time we loaded up on a lot of these large companies. Then the KKR‘s of the world started buying them because of their stable cash flow and the stocks went up. About six years ago, a lot of the energy-related stocks were very cheap. We owned oil shipping, oil services and coal companies trading below book and liquidation value. When oil went up they became the darlings of Wall Street. Over the years we have consistently owned electric utilities because there always seem to be stocks that are temporarily depressed because of a bad rate decision by the public service commission. Also, cyclicals have been a staple for us over the years because, by definition, they go up and down a lot which gives us buying opportunities. We‘ve been in and out of the hotel group, homebuilders, airlines, and tech stocks.

Performance of the low-price-to-tangible book value:

Read the Graham and Doddsville newsletter Fall 2010 (.pdf).

Hat tip George.

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Further to my Seahawk Drilling, Inc. (NASDAQ:HAWK) liquidation value post, I set out below the slightly more optimistic valuation of HAWK’s rigs if they can be sold as operating rigs. Here is a guide to the second-hand market for rigs (click to enlarge):

I’ve combined it with the list of HAWK’s rigs and their operating status from the July 2 Drilling Fleet Status Report to calculate the approximate second-hand market value of HAWK’s rigs:


Assumptions

Although a handful of HAWK’s rigs were built prior to 1980, I’ve assumed that the recent upgrades make the rigs saleable in the second-hand market. There is no market value for the 300′ MC (mat cantilever). 250′ MCs sell for around half the market price of 250′ ICs, so I’ve assumed that 300′  MCs might sell for half the price of 300′ ICs, which is $60M. I’ve also assumed that most of the cold-stacked rigs can be made operational with little expense, as Randy Stiller indicated in the presentation to the Macquarie Securities Small and Mid-Cap Conference. Stiller mentioned that two rigs require significant cap ex to be returned to operational status, although it isn’t clear which two or what “significant” means in practice. I’ve assumed that the 80′ MC is saleable only for scrap at $5M.

Valuation

I calculated that HAWK was worth around $154M in the more dour liquidation scenario, assuming that the rig value was $230M. This valuation suggests HAWK could be worth another ~$150M in rig value if most of the rigs can be sold as operational, which implies a liquidation value around $300M or around $25 per share. The risks are the cash burn and the Mexican tax issue, both of which I’ll examine in detail at a later date.

Hat tip John.

[Full Disclosure: I hold HAWK. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Farukh Farooqi, long-time supporter of Greenbackd, founder of Marquis Research, a special situations research and advisory firm (for more on Farukh and his methodology see The Deal in the article “Scavenger Hunter”) and Greenbackd guest poster (see, for example, Silicon Storage Technology, Inc (NASDAQ:SSTI) and the SSTI archive here) has launched a blog, Oozing Alpha. Says Farukh:

Oozing Alpha is a place to share event driven and special situations with the institutional investment community.

We welcome and encourage you to submit your top ideas (farukh@marquisllc.com).

The only limitation we impose is that your recommendations should not be widely covered by the sell side and must not have an equity market capitalization greater than $1 billion.

The ideas will no doubt be up to Farukh’s usual high standards. The blog is off to a good start: the color scheme is very attractive.

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The Wall Street Journal has an article, Activist Holders Eye Top Managers for Boards, discussing the trend for executives running public companies to switch to activist boardroom roles where they can oust executives who run other public companies:

To enhance their credibility in proxy fights, dissident investors increasingly put experienced corporate officials—including some former chief executives—on their board-seat slates, rather than simply propose relatively inexperienced managers from the activist firm. The tactic turns up the heat on the leaders of struggling businesses, and may increase dissidents’ board victories, sometimes resulting in the replacement of the CEO.

The “trend” is perhaps more in the telling than the numbers, but interesting nonetheless:

About 24% of 213 dissident nominees in 2009 contests had held top management roles at a public company, up from nearly 22% of 73 such candidates in 2004, reports data tracker FactSet SharkWatch.

The article focusses on John Mutch, the former CEO of Peregrine Systems Inc., who has “helped force out the heads of four small technology firms since 2006:”

“If I believe management is engaged in stupid, idiotic actions, I stand up and tell them so,” says Mr. Mutch. “In most cases, that means replacing the CEO.”

Most interesting for we net net folk was his involvement in the fight for Adaptec, Inc. (NASDAQ:ADPT), and the broader implications for activism in technology stocks:

Mr. Mutch says the experience convinced him that many high-tech companies “are undervalued, undermanaged and poorly governed.”

Mr. Mutch and Steel Partners launched a proxy battle for ADPT in 2007. Steel’s filings cited ADPT’s poor financial performance. Here’s the discussion in the reasons for the solicitation from the original proxy:

Given the Company’s poor track record, we believe that the Adaptec Board should not be trusted to assess acquisitions, growth investments, and product expansions while overseeing a restructuring plan.

Specifically, our concerns include the following:

· Adaptec’s operational performance has deteriorated under management and the Adaptec Board;

· Adaptec’s poor acquisition strategy and recent about-faces in strategic direction have resulted in further erosion to stockholder value;

· Adaptec’s stock performance has lagged indices and peers; and

· Adaptec has rewarded executive officers with excessive compensation packages and retention bonuses despite the Company’s poor performance.

ADPT agreed to put Mr. Mutch and Steel executives Jack Howard and John Quicke on its board ahead of the shareholder vote. The WSJ describes what happened next:

A contentious boardroom brawl occurred last August. Aristos Logic, which Adaptec acquired for $41 million in 2008, was generating less revenue growth than expected, Mr. Sundaresh informed analysts that month. Mr. Sundaresh proposed to fellow directors that they either sell the Aristos business or cut back investments severely to get costs under control, according to an attendee at the board meeting.

Mr. Mutch says he stood and attacked the CEO for switching strategy. “You sold us a bill of goods when you bought this company,” he recalls saying. “You’re not taking responsibility for this deal.” A shouting match erupted, with people “screaming at each other,” he adds.

Robert Loarie, another ally of Mr. Sundaresh, says Mr. Mutch unfairly accused the CEO of shirking his duties. Ex-director Joseph Kennedy says the dissidents also never grasped Adaptec’s strategy, and occasionally read newspapers during board discussions.

Mr. Mutch calls Mr. Kennedy’s and Mr. Loarie’s criticisms “incredulous.”

That same week, the split board replaced Mr. Howard as chairman. Steel won shareholders’ written approval to kick Messrs. Sundaresh and Loarie off the board last fall. The CEO soon resigned.

Mr. Mutch also joined activists to threaten proxy fights at Phoenix Technologies Ltd. (NASDAQ:PTEC), Aspyra, Inc (PINK:APYI) and Agilysys, Inc. (Public, NASDAQ:AGYS), and eventually got board seats at all three companies. Mr. Mutch says the CEOs in each case left during or soon after the possible contest. Perhaps a trend to watch.

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I’m considering launching a subscription-only service aimed at identifying stocks similar to those in the old Wall Street’s Endangered Species reports. Like the old Wall Street’s Endangered Species reports, I’ll be seeking undervalued industrial companies where a catalyst in the form a buy-out, strategic acquisition, liquidation or activist campaign might emerge to close the gap between price and value. The main point of difference between the old Piper Jaffray reports and the Greenbackd version will be that I will also include traditional Greenbackd-type stocks (net nets, sub-liquidation values etc) to the extent that those type of opportunities are available. The cost will be between $500 and $1,000 per annum for 48 weekly emails with a list of around 30 to 50 stocks and some limited commentary.

If you would like to receive a free trial copy of the report if and when it is produced in exchange for providing feedback on its utility (or lack thereof), would you please send an email to greenbackd [at] gmail [dot] com. If there is sufficient interest in the report I’ll go ahead and produce the trial copy.

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Yesterday I ran a post on Dr. Michael Burry, the value investor who was one of the first, if not the first, to figure out how to short sub-prime mortgage bonds in his fund, Scion Capital. In The Big Short, Michael Lewis discusses Burry’s entry into value investing:

Late one night in November 1996, while on a cardiology rotation at Saint Thomas Hospital, in Nashville, Tennessee, he logged on to a hospital computer and went to a message board called techstocks.com. There he created a thread called “value investing.” Having read everything there was to read about investing, he decided to learn a bit more about “investing in the real world.” A mania for Internet stocks gripped the market. A site for the Silicon Valley investor, circa 1996, was not a natural home for a sober-minded value investor. Still, many came, all with opinions. A few people grumbled about the very idea of a doctor having anything useful to say about investments, but over time he came to dominate the discussion. Dr. Mike Burry—as he always signed himself—sensed that other people on the thread were taking his advice and making money with it.

Michael Burry’s blog, http://www.valuestocks.net, seems to be lost to the sands of time, but Burry’s techstocks.com “Value Investing” thread (now Silicon Investor) still exists. The original post in the thread hints at the content to come:

Started: 11/16/1996 11:01:00 PM

Ok, how about a value investing thread?

What we are looking for are value plays. Obscene value plays. In the Graham tradition.

This week’s Barron’s lists a tech stock named Premenos, which trades at 9 and has 5 1/2 bucks in cash. The business is valued at 3 1/2, and it has a lot of potential. Interesting.

We want to stay away from the obscenely high PE’s and look at net working capital models, etc. Schooling in the art of fundamental analysis is also appropriate here.

Good luck to all. Hope this thread survives.

Mike

Hat tip Toby.

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Jon Heller of the superb Cheap Stocks, one of the inspirations for this site, has published the results of his two year net net index experiment in Winding Down The Cheap Stocks 21 Net Net Index; Outperforms Russell Microcap by 1371 bps, S&P 500 by 2537 bps.

The “CS 21 Net/Net Index” was “the first index designed to track net/net performance.” It was a simply constructed, capitalization-weighted index comprising the 21 largest net nets by market capitalization at inception on February 15, 2008. Jon had a few other restrictions on inclusion in the index, described in his introductory post:

  • Market Cap is below net current asset value, defined as: Current Assets – Current Liabilities – all other long term liabilities (including preferred stock, and minority interest where applicable)
  • Stock Price above $1.00 per share
  • Companies have an operating business; acquisition companies were excluded
  • Minimum average 100 day volume of at least 5000 shares (light we know, but welcome to the wonderful world of net/nets)
  • Index constituents were selected by market cap. The index is comprised of the “largest” companies meeting the above criteria.

The Index is naïve in construction in that:

  • It will be rebalanced annually, and companies no longer meeting the net/net criteria will remain in the index until annual rebalancing.
  • Only bankruptcies, de-listings, or acquisitions will result in replacement
  • Does not discriminate by industry weighting—some industries may have heavy weights.

If a company was acquired, it was not replaced and the proceeds were simply held in cash. Further, stocks were not replaced if they ceased being net nets.

Says Jon of the CS 21 Net/Net Index performance:

This was simply an experiment in order to see how net/nets at a given time would perform over the subsequent two years.

The results are in, and while it was not what we’d originally hoped for, it does lend credence to the long-held notion that net/nets can outperform the broader markets.

The Cheap Stocks 21 Net Net Index finished the two year period relatively flat, gaining 5.1%. During the same period, The Russell Microcap Index was down 8.61%, while the Russell Microcap Index was down 9.9%. During the same period, the S&P 500 was down 20.27%.

Here are the components, including the weightings and returns of each:

Adaptec Inc (ADPT)
Weight: 18.72%
Computer Systems
+7.86%
Audiovox Corp (VOXX)
Weight: 12.20%
Electronics
-29.28%
Trans World Entertainment (TWMC)
Weight:7.58%
Retail-Music and Video
-69.55%
Finish Line Inc (FINL)
Weight:6.30%
Retail-Apparel
+350.83%
Nu Horizons Electronics (NUHC)
Weight:5.76%
Electronics Wholesale
-25.09%
Richardson Electronics (RELL)
Weight:5.09%
Electronics Wholesale
+43.27%
Pomeroy IT Solutions (PMRY)
Weight:4.61%
Acquired
-3.8%
Ditech Networks (DITC)
Weight:4.31%
Communication Equip
-56.67%
Parlux Fragrances (PARL)
Weight:3.92%
Personal Products
-51.39%
InFocus Corp (INFS)
Weight:3.81%
Computer Peripherals
Acquired
Renovis Inc (RNVS)
Weight:3.80%
Biotech
Acquired
Leadis Technology Inc (LDIS)
Weight:3.47%
Semiconductor-Integrated Circuits
-92.05%
Replidyne Inc (RDYN) became Cardiovascular Systems (CSII)
Weight:3.31%
Biotech
[Edit: +126.36%]
Tandy Brands Accessories Inc (TBAC)
Weight:2.94%
Apparel, Footwear, Accessories
-57.79%
FSI International Inc (FSII)
Weight:2.87%
Semiconductor Equip
+66.47%
Anadys Pharmaceuticals Inc (ANDS)
Weight:2.49%
Biotech
+43.75%
MediciNova Inc (MNOV)
Weight:2.33%
Biotech
+100%
Emerson Radio Corp (MSN)
Weight:1.71%
Electronics
+118.19%
Handleman Co (HDL)
Weight:1.66%
Music- Wholesale
-88.67%
Chromcraft Revington Inc (CRC)
Weight:1.62%
Furniture
-54.58%
Charles & Colvard Ltd (CTHR)
Weight:1.50%
Jewel Wholesale
-7.41%

Cash Weight: 8.58%

Jon is putting together a new net net index, which I’ll follow if he releases it into the wild.

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Jae Jun at Old School Value has updated his great post back-testing the performance of net current asset value (NCAV) against “net net working capital” (NNWC) by refining the back-test (see NCAV NNWC Backtest Refined). His new back-test increases the rebalancing period to 6 months from 4 weeks, excludes companies with daily volume below 30,000 shares, and introduces the 66% margin of safety to the NCAV stocks (I wasn’t aware that this was missing from yesterday’s back-test, and would explain why the performance of the NCAV stocks was so poor).

Jae Jun’s original back-test compared the performance of NCAV and NNWC stocks over the last three years. He calculated NNWC by discounting the current asset value of stocks in line with Graham’s liquidation value discounts, but excludes the “Fixed and miscellaneous assets” included by Graham. Here’s Jae Jun’s NNWC formula:

NNWC = Cash + (0.75 x Accounts receivables) + (0.5 x  Inventory)

Here’s Graham’s suggested discounts (extracted from Chapter XLIII of Security Analysis: The Classic 1934 Edition “Significance of the Current Asset Value”):

As I noted yesterday, excluding the “Fixed and miscellaneous assets” from the liquidating value calculation makes for an exceptionally austere valuation.

Jae Jun has refined his screening criteria as follows:

  • Volume is greater than 30k
  • NCAV margin of safety included
  • Slippage increased to 1%
  • Rebalance frequency changed to 6 months
  • Test period remains at 3 years

Here are Jae Jun’s back-test results with the new criteria:

For the period 2001 to 2004

For the period 2004 to 2007

For the period 2007 to 2010


It’s an impressive analysis by Jae Jun. Dividing the return into three periods is very helpful. While the returns overall are excellent, there were some serious smash-ups along the way, particularly the February 2007 to March 2009 period. As Klarman and Taleb have both discussed, it demonstrates that your starting date as an investor makes a big difference to your impression of the markets or whatever theory you use to invest. Compare, for example, the experiences of two different NCAV investors, one starting in February 2003 and the second starting in February 2007. The 2003 investor was up 500% in the first year, and had a good claim to possessing some investment genius. The 2007 investor was feeling very ill in March 2009, down around 75% and considering a career in truck driving. Both were following the same strategy, and so really had no basis for either conclusion. I doubt that thought consoles the trucker.

Jae Jun’s Old School Value NNWC NCAV Screen is available here (it’s free).

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Jae Jun at Old School Value has a great post, NCAV NNWC Screen Strategy Backtest, comparing the performance of net current asset value stocks (NCAV) and “net net working capital” (NNWC) stocks over the last three years. To arrive at NNWC, Jae Jun discounts the current asset value of stocks in line with Graham’s liquidation value discounts, but excludes the “Fixed and miscellaneous assets” included by Graham. Here’s Jae Jun’s NNWC formula:

NNWC = Cash + (0.75 x Accounts receivables) + (0.5 x  Inventory)

Here’s Graham’s suggested discounts (extracted from Chapter XLIII of Security Analysis: The Classic 1934 Edition “Significance of the Current Asset Value”):

Excluding the “Fixed and miscellaneous assets” from the NNWC calculation provides an austere valuation indeed (it makes Graham look like a pie-eyed optimist, which is saying something). The good news is that Jae Jun’s NNWC methodology seems to have performed exceptionally well over the period analyzed.

Jae Jun’s back-test methodology was to create two concentrated portfolios, one of 15 stocks and the other of 10 stocks. He rolled the positions on a four-weekly basis, which may be difficult to do in practice (as Aswath Damodaran pointed out yesterday, many a slip twixt cup and the lip renders a promising back-tested strategy useless in the real world). Here’s the performance of the 15 stock portfolio:

“NNWC Incr.” is “NNWC Increasing,” which Jae Jun describes as follows:

NNWC is positive and the latest NNWC has increased compared to the previous quarter. In this screen, NNWC doesn’t have to be less than current market price. Since the requirement is that NNWC is greater than 0, most large caps automatically fail to make the cut due to the large quantity of intangibles, goodwill and total debt.

Both the NNWC and NNWC Increasing portfolios delivered exceptional returns, up 228% and 183% respectively, while the S&P500 was off 26%. The performance of the NCAV portfolio was a surprise, eeking out just a 5% gain over the period, which is nothing to write home about, but still significantly better than the S&P500.

The 10 stock portfolio’s returns are simply astonishing:

Jae Jun writes:

An original $100 would have become

  • NCAV: $103
  • NNWC: $544
  • NNWC Incr: $503
  • S&P500: $74

That’s a gain of over 400% for NNWC stocks!

Amazing stuff. It would be interesting to see a full academic study on the performance of NNWC stocks, perhaps with holding periods in line with Oppenheimer’s Ben Graham’s Net Current Asset Values: A Performance Update for comparison. You can see Jae Jun’s Old School Value NNWC NCAV Screen here (it’s free). He’s also provided a list of the top 10 NNWC stocks and top 10 stocks with increasing NNWC in the NCAV NNWC Screen Strategy Backtest post.

Buy my book The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market from on Kindlepaperback, and Audible.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on The Acquirer’s Multiple, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on the deep value stock screener at The Acquirer’s Multiple®.

 

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Regular readers of Greenbackd know that I’m no fan of “the narrative,” which is the story an investor concocts to explain the various pieces of data the investor gathers about a potential investment. It’s something I’ve been thinking about a great deal recently as I grapple with the merits of an investment in Japanese net current asset value stocks. The two arguments for and against investing in such opportunities are as follows:

Fer it: Net current asset value stocks have performed remarkably well throughout the investing world and over time. In support of this argument I cite generally Graham’s experience, Oppenheimer’s Ben Graham’s Net Current Asset Values: A Performance Update paper, Testing Ben Graham’s Net Current Asset Value Strategy in London, a paper from the business school of the University of Salford in the UK, and, more specifically, Bildersee, Cheh and Zutshi’s The performance of Japanese common stocks in relation to their net current asset values, James Montier’s Graham’’s net-nets: outdated or outstanding?, and Dylan Grice’s Are Japanese equities worth more dead than alive.

Agin it: Japan is a special case because it has weak shareholder rights and a culture that regards corporations as “social institutions with a duty to provide stable employment and consider the needs of employees and the community at large, not just shareholders.” In support of this argument I cite the recent experiences of activist investors in Japan, and Bildersee, Cheh and Zutshi’s The performance of Japanese common stocks in relation to their net current asset values (yes, it supports both sides of the argument). Further, the prospects for Japan’s economy are poor due to its large government debt and ageing population.

How to break the deadlock? Montier provides a roadmap in his excellent Behavioural Investing:

We appear to use stories to help us reach decisions. In the ‘rational’ view of the world we observe the evidence, we then weigh the evidence, and finally we come to our decision. Of course, in the rational view we all collect the evidence in a well-behaved unbiased fashion. … Usually we are prone to only look for the information that happens to agree with us (confirmatory bias), etc.

However, the real world of behaviour is a long way from the rational viewpoint, and not just in the realm of information gathering. The second stage of the rational decision is weighing the evidence. However, as the diagram below shows, a more commonly encountered approach is to construct a narrative to explain the evidence that has been gathered (the story model of thinking).

Hastie and Pennington (2000) are the leading advocates of the story view (also known as explanation-based decision-making). The central hypothesis of the explanation-based view is that the decision maker constructs a summary story of the evidence and then uses this story, rather than the original raw evidence, to make their final decision.

All too often investors are sucked into plausible sounding story. Indeed, underlying some of the most noted bubbles in history are kernels of truth.

As to the last point, arguably, the converse is also true. Investors have missed some great returns because the ugly stories about companies or markets were so compelling.

There are several points that are not contentious about an investment in Japan. The data suggests to me and to everyone else that there are a large number of net current asset value bargains available there. The contention is whether these net current asset value stocks will perform as they have in other countries, or whether they are destined to remain net current asset value bargains, the classic “value traps.” My own penchant for value investing, and quantitative value investing in particular, makes this a reasonably simple matter to resolve. I am going to invest in Japanese net current asset value stocks. Here are the bases for my reasoning:

  • I believe that value investing works. I believe that this is the case because it appeals to me as a matter of logic. I also believe that the data supports this position (see Ben Graham’s Net Current Asset Values: A Performance Update or Lakonishok, Shleifer, and Vishny’s Contrarian Investment, Extrapolation and Risk). Where a stock trades at a significant discount to its value, I am going to take a position.
  • I believe that Graham’s net current asset value works. In support of this proposition I cite the papers listed in the “Fer it” argument above.
  • I believe that simple quantitative models consistently outperform expert judgements. In support of this proposition generally I cite James Montier’s Painting By Numbers: An Ode To Quant. Where the data looks favorable to me, I am going to take a position, and I’m going to ignore the qualitative factors.
  • I believe that value is a good predictor of returns at a market level. In support I cite the Dimson, Marsh and Staunton research. I am not dissuaded from investing in a country simply because its growth prospects are low. Value is the signal predictor of returns.

The arguments militating against investing in Japan sound to me like the arguments militating against any investment in a NCAV stock, which is to say that they are arguments rooted in the narrative. I’ve never taken a position in a NCAV stock that had a good story attached to it. They have always looked ugly from an earnings or narrative perspective (otherwise, they’d be trading at a higher price). As far as I can tell, this situation is no different, other than the fact that it is in a different country and the country has economic problems (which I would ignore in the usual case anyway). While the research specific to NCAV stocks in Japan is not as compelling as I would like it to be, I always bear in mind the lessons of Taleb’s “naive empiricist,” which is to say that the data are useful only up to a point.

This is not to say that I have any great conviction about Japan or Japanese net current asset value stocks. Far from it. I fully expect, as I always do when taking a position in any stock, to be wrong and have the situation follow the narrative. Fortunately, the decision is out of my hands. I’m going to follow my simple quantitative model – the Graham net current asset value strategy – and take some positions in Japanese net nets. The rest is for the goddess Fortuna.

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