If you have not figured out already I enjoy investing in really cheap companies. These sorts of companies are called net nets or as Warren Buffett called them, cigar butts. This is because they were terrible companies that had one last hurrah left before the disappeared into obscurity.
A net net was first popularized by Benjamin Graham and outlined in his book the Intelligent Investor. These types of investments were the domain of the enterprising investor. Net current asset value stocks or net nets are characterized by the fact that they are trading below their net current asset value.
Net current asset value or NCAV is typically made up of:
- Cash and cash equivalents.
- Inventory.
- Receivables.
- Prepaid Expenses.
The idea is that you can buy these stocks for not only less than their book value, but also less than the value of their more short term assets. It is an extremely conservative approach to capital preservation which is very intriguing to me.
My International Net Net Portfolio
There are a few ways to invest in net nets. Either you can buy net nets that are losing money or ones that are profitable. You can even buy ones that pay a dividend. My favorite approach is buying net nets that pay a dividend and are mostly profitable.
The reason I invest in dividend paying net nets, is because there is less skill involved to achieve outstanding returns. It’s not the best method of net net investing but it is the safest. Studies have show with this method you can achieve 20% annualized. This is also the way Benjamin Graham invested.
In order to find stocks like this to invest in, I generally have to look abroad since not many exist in the United States. Therefore my net net portfolio is made up almost entirely of international stocks. As not to put my entire net worth into international stocks I also buy stocks in the United States that trade below book value. However, my results below are only for those stocks that are trading below NCAV.
One Month Results and Lessons Learned
This month proved to be a fairly good month as far as my returns. However, a great deal of the stocks I own are located in Japan. Many of these stocks pay out dividends just once per year. The Ex-dividend date is set for March 30th so it may make my returns this month look better than they are normally.
While the last year has been great for my net net portfolio returns my CAGR or overall time weighted average returns is still negative. This does not mean I lost money though since TWR or time weighted returns are based on time weightings vs MWR which is money weighted and takes into account any additional capital that was added.
For the month of March TWR and MWR are the same since no money was added to the account. I may end up utilizing MWR in the future if I do add money to the account to ensure a more accurate representation on my monthly returns based on capital used.
My First Extremely Successful Net Net Stock Sale
In order to avoid front running stocks I can not reveal what stocks I currently have in my portfolio. I also cannot discuss stocks that I want to buy. The reasoning behind this is because the market caps are far to small and if I mention them I could impact the stock price and in turn engage in an illegal grey area.
Having said that I did sell one of my successful net nets during the month. The stock was NTT Systems. A Polish based company that managed to rise during the pandemic. It may be that many individuals needed to upgrade their computer gear in order to keep up with a work from home environment, or it could also be many teens decided to invest more into their gaming setups.
Either way NTT Systems is posting some great profits and rising in value.
I decided to sell the stock in its entirety and reinvest into stocks that were much cheaper. NTT has gone past NCAV and had served its purpose in my portfolio. I had also held it for nearly 2 years which made it an easy sell as my capital gains tax burden would be much lower.
Even if a stock zooms past NCAV I will usually hold it if it has not reached a year sitting in my portfolio. I regret that I did not invest more into this stock when I first bought it. I had no idea it’s potential in a pandemic economy. Looking back it is a lesson learned to look for any stocks in your portfolio that may have unforeseen benefits.
Goals For April 2021 Net Net Portfolio
I recently refinanced my house in order to balance out my stocks to real estate investments. This is giving me nearly a 50/50 split on the two. It is also extremely beneficial as it is lowering my cash flow requirements and increasing my revenue. Check out the article to learn how.
I have already outlined some stocks that I currently want to buy in April and I have made it imperative that I only buy stocks that are yielding a dividend over 3%. This is actually not hard to do in the Japanese economy. I also want to learn more about commodities that will benefit in an inflation driven environment in order to protect my portfolio.
I currently have a little over 20 stocks in my portfolio so adding more will undoubtedly lesson my risk for any individual stock but it has come to a point where adding any more will become a mental burden. It may be best to consolidate poorly performing and low dividend stocks for cheap higher yielding stocks.
Also I will be monitoring the Tokyo Olympics to see how it will impact any stocks in my portfolio. I had recently believed it would be a great boon to many of my stocks last year but its postponement has given me more time to position myself for any benefits.