Thanks for sharing. On the net-net side do you look for catalysts that suggest that either 1. The business will improve rapidly, improving ROE, and therefore closing the gap to asset value; or 2. The business will be liquidated in the near term?
I ask because I don’t do super deep value stuff but interests me but I would think something just being super cheap isn’t good enough on its own to generate returns. If the business continues to suffer or the management is horrible with capital allocation or wastes the assets that were originally perceived as a margin of safety, it deserves to trade for less than NCAV, right?
Sorry for all the questions, just really curious to learn more!
Pretty much yes - although I don't always necessarily require catalysts, I always really try hard to avoid falling into value traps. An excessive discount can often be a catalyst on its own. I personally look for cases where you can 'smell the change' basically. Be it some paths to business improvement, corporate actions, activists etc. I frequently buy beaten down companies where there are no paths to immediate improvement, but then what I want to see is the possibility of future improvement. A good example is my current bet on net-nets from the European steel industry - the industry is in a terrible state, but as it's a cyclical industry (and not horse stables during early 1900's), there's probably a high chance that the situation is going to start stabilizing at some point. It could well be a year or 5 years, so buying only the cheapest stuff is the way to go in this case.
If a business continues to suffer, has terrible management, burns cash like crazy that often gives me no real margin of safety and I usually skip companies of this sort, although I know a few people that buy the worst trash and beat my own results :D
Yes, I'd say 95-98% of the companies trading below NCAV or far below book value today deserve the valuation, roughly. That is precisely why I'm so picky - of course you can make money by buying stuff like that, but it's speculative in nature and, thus, not something I'd feel comfortable with. Some people treat the discount to NCAV as one of the main criteria, for me, it's only a starting point that should lead to a deeper analysis. There are cheap companies trading below NCAV, and there are cheap companies trading far above NCAV, but with low P/BV, for example. It all depends.
Also, having a catalyst usually means lower discounts. People like to have stuff written down, concrete word by word promises of change from the management, as uncertainty is uncomfortable no matter how small.
Love it. This is the exact kinda stuff that gets my blood pumping as a value investor. Looking forward to taking a closer look into your picks - mind if I fire any burning questions over your way when I'm doing so?
I really appreciate your words :)) Trying my best to give you content of the highest quality, and I would love to answer any questions. If needed, don't be afraid to say stuff directly, without unnecessary polite fluff. If you think I might have made a mistake somewhere, for example, I would love to hear the critique from you!
In relation to ANX.L, this is a special situation with a long running class action legal claim being brought by the law firm within the ANX.L group that is due to settle imminently. Liability has all but been established and settlement has already occurred with VW. Still to settle are Mercedes, BMW and other leading auto brands. The company utilized leverage to bring these legal actions which have been running for nearly a decade. The impact on the balance sheet has impacted valuations, which frankly are ludicrous. The company is trading for less than half of its NAV, which means that you could buy the business outright, settle its debts and still double your money. That places a negative value on the operations of the business which are going from strength to strength. The company refused a takeover attempt by PE firm DBAY in 2021 at twice the market cap of the business currently - of note is that DBAY have accumulated nearly 30% of the business and have stuck with it throughout. When the motor manufacturers settle the legal claims, the company will use the cash to clean up its balance sheet and a re-rating of the stock will occur. In anticipation of this happening the stock is already up about 25% in the past month and is still climbing, up another 3.9% today. IMHO it should be valued at somewhere between 2x and 3x where it trades today. This was the original write up: https://rockandturner.substack.com/p/anexo-a-charlie-munger-fat-man-opportunity
Thanks for sharing. On the net-net side do you look for catalysts that suggest that either 1. The business will improve rapidly, improving ROE, and therefore closing the gap to asset value; or 2. The business will be liquidated in the near term?
I ask because I don’t do super deep value stuff but interests me but I would think something just being super cheap isn’t good enough on its own to generate returns. If the business continues to suffer or the management is horrible with capital allocation or wastes the assets that were originally perceived as a margin of safety, it deserves to trade for less than NCAV, right?
Sorry for all the questions, just really curious to learn more!
Hey there, these are some great questions!
Pretty much yes - although I don't always necessarily require catalysts, I always really try hard to avoid falling into value traps. An excessive discount can often be a catalyst on its own. I personally look for cases where you can 'smell the change' basically. Be it some paths to business improvement, corporate actions, activists etc. I frequently buy beaten down companies where there are no paths to immediate improvement, but then what I want to see is the possibility of future improvement. A good example is my current bet on net-nets from the European steel industry - the industry is in a terrible state, but as it's a cyclical industry (and not horse stables during early 1900's), there's probably a high chance that the situation is going to start stabilizing at some point. It could well be a year or 5 years, so buying only the cheapest stuff is the way to go in this case.
If a business continues to suffer, has terrible management, burns cash like crazy that often gives me no real margin of safety and I usually skip companies of this sort, although I know a few people that buy the worst trash and beat my own results :D
Yes, I'd say 95-98% of the companies trading below NCAV or far below book value today deserve the valuation, roughly. That is precisely why I'm so picky - of course you can make money by buying stuff like that, but it's speculative in nature and, thus, not something I'd feel comfortable with. Some people treat the discount to NCAV as one of the main criteria, for me, it's only a starting point that should lead to a deeper analysis. There are cheap companies trading below NCAV, and there are cheap companies trading far above NCAV, but with low P/BV, for example. It all depends.
Also, having a catalyst usually means lower discounts. People like to have stuff written down, concrete word by word promises of change from the management, as uncertainty is uncomfortable no matter how small.
I appreciate your comment :)
Love it. This is the exact kinda stuff that gets my blood pumping as a value investor. Looking forward to taking a closer look into your picks - mind if I fire any burning questions over your way when I'm doing so?
I really appreciate your words :)) Trying my best to give you content of the highest quality, and I would love to answer any questions. If needed, don't be afraid to say stuff directly, without unnecessary polite fluff. If you think I might have made a mistake somewhere, for example, I would love to hear the critique from you!
In relation to ANX.L, this is a special situation with a long running class action legal claim being brought by the law firm within the ANX.L group that is due to settle imminently. Liability has all but been established and settlement has already occurred with VW. Still to settle are Mercedes, BMW and other leading auto brands. The company utilized leverage to bring these legal actions which have been running for nearly a decade. The impact on the balance sheet has impacted valuations, which frankly are ludicrous. The company is trading for less than half of its NAV, which means that you could buy the business outright, settle its debts and still double your money. That places a negative value on the operations of the business which are going from strength to strength. The company refused a takeover attempt by PE firm DBAY in 2021 at twice the market cap of the business currently - of note is that DBAY have accumulated nearly 30% of the business and have stuck with it throughout. When the motor manufacturers settle the legal claims, the company will use the cash to clean up its balance sheet and a re-rating of the stock will occur. In anticipation of this happening the stock is already up about 25% in the past month and is still climbing, up another 3.9% today. IMHO it should be valued at somewhere between 2x and 3x where it trades today. This was the original write up: https://rockandturner.substack.com/p/anexo-a-charlie-munger-fat-man-opportunity
That's a beautiful summary. I appreciate that you've expanded on the thesis :)