Micro caps

[One Idea]

Two of Buffett’s claims that seem to contradict each other:

 

1) He has said openly that if he were starting with a small portfolio of < 10M, he could GUARANTEE 50% returns.

 

2) He has said that if he could go back to a small portfolio, he would seek out Ben Graham net-nets.

 

This is the message we hear over and over.  If you take these two statements at face value, it’s seems that most of us should be focusing entirely on small/micro cap net-net companies <100M.

 

But then what did he do differently than Ben Graham and Walter Schloss who devoted their lives to the net-net and “only” averaged around 20% over their careers?  What I’m really wondering is if it is possible to guarantee 50% returns doing ONLY net-nets, or is there something he’s not telling us?  Would WB be buying BAC warrants and other derivatives? 

 

It seems like he would have to venture into special situation investing to get these returns.  But then that conclusion contradicts the spirit in which he made these claims.

 

Is the answer a concentrated portfolio of net-nets?  Or are we just kidding ourselves to think he wouldn't be investing along-side Ericopoly?

[Hielko]

I think you should take both statements with a grain of salt. No-one can guarantee 50% returns, not even if your name is Warren Buffett. Well.. actually he can probably make 50% in a day if he buys some nanocap company and announces the world that he sees 10x upside. But if he wouldn't have to sell-fulfilling fame it's just not going to happen. Being a good investors doesn't make you invulnerable to an 1929/1987/2008 type event, and if you want to deliver 50% returns in those years you really need a silly amount of alpha.

[Packer16]

I think concentration would be part of it.  If you look at the highest performing Graham and Doddsville managers (Buffet, Munger and Guerin), they all were concentrators.  They are willing to do what others are not - concentrate versus the "free lunch" diversification provides.  I personally think the concentrators eat the diversifiers lunch.

 

Packer

[Parsad]

Awesome. A quick question Parsad: is it possible when writing responses to "quote" just selected areas, rather than "inserting quote" and then deleting what you don't want to quote? Maybe this is a vBulletin only feature, but on other forums, you can highlight the text and a dialog box that says "quote" appears and if clicked, only quotes that section of the message in the reply editor. Thank you!

 

You can do it the way I just did your comments:

 

Highlight the text, right click copy, paste in reply, and then highlight again and click the italics button.  It won't include the name of the person you are quoting, but you will just quote what you want.

 

Cheers!

[DoddDisciple]

Two of Buffett’s claims that seem to contradict each other:

 

1) He has said openly that if he were starting with a small portfolio of < 10M, he could GUARANTEE 50% returns.

 

2) He has said that if he could go back to a small portfolio, he would seek out Ben Graham net-nets.

 

This is the message we hear over and over.  If you take these two statements at face value, it’s seems that most of us should be focusing entirely on small/micro cap net-net companies <100M.

 

But then what did he do differently than Ben Graham and Walter Schloss who devoted their lives to the net-net and “only” averaged around 20% over their careers?  What I’m really wondering is if it is possible to guarantee 50% returns doing ONLY net-nets, or is there something he’s not telling us?  Would WB be buying BAC warrants and other derivatives? 

 

It seems like he would have to venture into special situation investing to get these returns.  But then that conclusion contradicts the spirit in which he made these claims.

 

Is the answer a concentrated portfolio of net-nets?  Or are we just kidding ourselves to think he wouldn't be investing along-side Ericopoly?

 

Hi, One Idea. I've been struggling with this very thing. I'm not expecting 50% returns at all, but 20% and down sounds mighty satisfying if I have a 50 year investing runway to play with.

 

I have another post on here (quantitative net-net investing) you may want to look at. I've thought about it a little more and there are some other metrics I'd like to look at/analyze, but in short, I think net-net and net-cash (negative enterprise) investing can potentially be the bulk investment strategy if one goes internationally.

 

I'm leaning towards taking my USD, splitting it among 5 or 6 major currencies, and then buying baskets (say 10) of net-nets per exchange I'm interested in. I hold for at least a year (maybe less for something that's already gone down like 80%-90% for the tax savings) and up to 2-3 years. Each basket is on its own timeline, removing, to me, a lot of the overall volatility of the portfolio.

 

For example, say we have another 2008 event. Scary as hell to be down 60%+ and also have everything on the same timetable when you're re-balancing your whole portfolio at the same time. But with this flow, which acts sort of like dollar cost averaging, I think I could stick with it more.

 

The big issues for me come to finding data. I'm playing around with screener.co and other sites, and notice some metrics that I'd like to see, like insider ownership and retained earnings, are nulls, or Zscores that seem incorrect within the screens. Looks like I'll have to do a lot more by hand than I thought, which I guess means net-nets aren't as much of a free lunch as I thought time-wise :)

[DoddDisciple]

To Parsad:

 

Haha, thanks :) I'm not too familiar with forum platforms, but the reason I think quoting with the markups (quote, user, and all that) is better is that the quoted person is notified that you brought them up, making it more likely they'll come back and respond. For example, on other forums, if I quote someone or they quote me, I actually see it in an email and/or on the dashboard for the forum.

[hyten1]

One Idea,

 

i think you have many assumptions to arrive at your conclusion:

 

1. you are assuming what ben graham and Walter Schloss achieved with net-net is the best that "anyone" can do. i would bet buffett can do better, that is just my opinion.

 

2. i think buffett said seek out net-net, did he said ONLY net net? i don't think so.

 

3. also i think folks need to be more flexible, as we all know stock market is a very dynamic and changing beast. even if buffett said net-net in 2013 (i just pick a year for illustration purposes) that doesn't mean things doesn't change. i would think buffett can make good money doing all kinds of things, more than most of us can achieve. buffett can prob thrive under various types of environment that many of us won't able to. also you can see this just by looking at history. before 1970's came along, buffett was making a killing, but when the situation changes he adapted (he closed his fund). the point is i am sure buffett can and will adapt.

 

- also i think many know Walter had hundreds of positions and ben was very conservative and didn't get involve with management like buffett would and have done. just some example of things that buffett would prob do differently.

 

 

hy

 

 

 

Two of Buffett’s claims that seem to contradict each other:

 

1) He has said openly that if he were starting with a small portfolio of < 10M, he could GUARANTEE 50% returns.

 

2) He has said that if he could go back to a small portfolio, he would seek out Ben Graham net-nets.

 

This is the message we hear over and over.  If you take these two statements at face value, it’s seems that most of us should be focusing entirely on small/micro cap net-net companies <100M.

 

But then what did he do differently than Ben Graham and Walter Schloss who devoted their lives to the net-net and “only” averaged around 20% over their careers?  What I’m really wondering is if it is possible to guarantee 50% returns doing ONLY net-nets, or is there something he’s not telling us?  Would WB be buying BAC warrants and other derivatives? 

 

It seems like he would have to venture into special situation investing to get these returns.  But then that conclusion contradicts the spirit in which he made these claims.

 

Is the answer a concentrated portfolio of net-nets?  Or are we just kidding ourselves to think he wouldn't be investing along-side Ericopoly?

[DoddDisciple]

hyten1:

 

I agree that you have to do a lot more to get 50% returns per year.

 

However, I think net-nets and net-cash bargains remain a good way for someone not interested in devoting their life to generating investment returns. Both provide absolute, rather than relative values, of cheapness. For example, there are always the 10% lowest stocks when it comes to P/E (even if they as a group could be overvalued), but at times, there may be little to no worthwhile net-net investments.

 

Internationally, there should always be enough net-nets for the foreseeable future for a good basket, but that may change as those markets are analyzed in greater detail and opportunities are diminished. Of course, if you expand to net-net being anything current current assets > total liabilities, versus 66% of market cap, then I think they as a group will always exist.

 

Just throwing some thoughts out there :P

[twacowfca]

One Idea,

 

i think you have many assumptions to arrive at your conclusion:

 

1. you are assuming what ben graham and Walter Schloss achieved with net-net is the best that "anyone" can do. i would bet buffett can do better, that is just my opinion.

 

2. i think buffett said seek out net-net, did he said ONLY net net? i don't think so.

 

3. also i think folks need to be more flexible, as we all know stock market is a very dynamic and changing beast. even if buffett said net-net in 2013 (i just pick a year for illustration purposes) that doesn't mean things doesn't change. i would think buffett can make good money doing all kinds of things, more than most of us can achieve. buffett can prob thrive under various types of environment that many of us won't able to. also you can see this just by looking at history. before 1970's came along, buffett was making a killing, but when the situation changes he adapted (he closed his fund). the point is i am sure buffett can and will adapt.

 

- also i think many know Walter had hundreds of positions and ben was very conservative and didn't get involve with management like buffett would and have done. just some example of things that buffett would prob do differently.

 

 

hy

 

 

 

Two of Buffett’s claims that seem to contradict each other:

 

1) He has said openly that if he were starting with a small portfolio of < 10M, he could GUARANTEE 50% returns.

 

2) He has said that if he could go back to a small portfolio, he would seek out Ben Graham net-nets.

 

This is the message we hear over and over.  If you take these two statements at face value, it’s seems that most of us should be focusing entirely on small/micro cap net-net companies <100M.

 

But then what did he do differently than Ben Graham and Walter Schloss who devoted their lives to the net-net and “only” averaged around 20% over their careers?  What I’m really wondering is if it is possible to guarantee 50% returns doing ONLY net-nets, or is there something he’s not telling us?  Would WB be buying BAC warrants and other derivatives? 

 

It seems like he would have to venture into special situation investing to get these returns.  But then that conclusion contradicts the spirit in which he made these claims.

 

Is the answer a concentrated portfolio of net-nets?  Or are we just kidding ourselves to think he wouldn't be investing along-side Ericopoly?

 

 

Lets put Warren's remarks in context.  The remark about making 50% annual returns was an ad lib to a hypothetical question about the possibility of making such a return.  I interpreted the ad lib that such a return was not only possible but that Warren was confident that he could make that return if he were only managing $10M to the fact that he was actually making a 50% annual return on a sub segment of his personal funds that he was investing then.

 

He most emphatically did not say that he could make that return always under all conditions.

 

Sometime there is an unusual confluence of highly probable events that makes extraordinary returns possible in small accounts.  In late 2012 and early 2013, I was able to run a small account of a close relative from 60 to 460 merely by concentrating in F&F Prefs and short term calls on BRK when the stock price was equal to or less than the "strike price" of the "free put".  :) 

 

We had nice returns in larger accounts from gains in F&F and BRK, but nothing close to that.

[Palantir]

I think Buffett would take more concentrated positions than Graham ever would. I suspect he'd go after net nets and special situation, but he may well make one particular holding a large section of his portfolio.

 

 

Just what Mr Sanjeev is doing in the other thread.

[matjone]

I am not sure what quotes you looked at but I have seen a couple.  I remember him saying he would buy net nets, but that he'd also buy a quality company if it was the right price, and also do some arbitrages.  I remember him saying it wouldn't necessarily all be in stocks.

 

Geoff Gannon has a post about what types of things he did during the early 50's before he started the partnership.  He earned excellent returns back then

 

http://www.gurufocus.com/news/169950/how-warren-buffett-made-his-first-100000

 

There is some stuff in Snowball about this period as well.

 

The union street railway example is a good one to illustrate how he'd outperform the basket of net nets.  Graham and Schloss probably would have seen something like that and bought a couple percent position and lumped it in with other net nets that weren't as attractive.  Buffett dug deeper and saw that this one was better than the other ones and loaded up on it.

 

I think Packer is right about concentrating, IF you know what you are doing.  If you don't you are going to go broke, which is most are scared to try it. 

 

I think that most diversifiers probably at most times have one or two or three holdings they are excited about, but they just bump them up to 5 or 10% instead of 40-60 like Buffett.  I have been thinking about this recently and had an idea.  I think an investor who has followed the diversified Graham-Dodd/Schloss way and done well and become competent identifying bargains might benefit from starting a separate account with  5% or so of his capital and devoting it to a concentrated strategy of 1-3 of his best ideas.  The rule is, once you start the account you never add more money.  After a few years the market is going to let you know whether you were as smart as you thought.  If it turns out you weren't, and the account goes to zero, that's fine - you stick with the old way and still do alright with the other 95% of your capital.  You'll always be 5% poorer, but that's probably not going to make that much difference in your life.  But, if it turns out you were really that good, you could end up a lot richer over a decade.  If you do 50% like Buffett then your concentrated account is going to dwarf your diversified account in 20 years.

[JBird]

2) He has said that if he could go back to a small portfolio, he would seek out Ben Graham net-nets.

 

He never said he'd only invest in net-nets. And I'm quite certain he wouldn't limit himself to such situations.

[JBird]

Shareholder: Recently, at Wharton, Mr. Buffett, you talked about the problems of compounding large sums of money. You were quoted in the local paper as saying that you're confident that if you were working with a small sum closer to $1 million, you could compounded at a 50% rate. For those of us not saddled with a $100 million problem, could you talk about what types of investments you'd be looking at and where in today's market, you think significant inefficiencies exist?

 

Buffett: I may have been very slightly misquoted, but I certainly said something to that effect. I talked about how I polled this group of 60 or so people I get together with every couple of years as to what rate they think they can compound money at if they were investing small sums: $100,000, $1million, $100 million, $1 billion, etc. And I pointed out how the return expectations of the members of this group go very rapidly down the slope.

 

But it's true. I could name half a dozen people that I think can compound $1 million at 50% per year -- at least they'd have that return expectation -- if they needed it. They'd have to give that $1 million their full attention. But they couldn't compound $100 million or $1 billion at anything remotely like that rate.

 

There are little tiny areas, as I said, in that Adam Smith interview a few years ago, where if you start with A and you go through and look at everything -- and look for small securities in your area of competence where you can understand the business and occasionally find little arbitrage situations or little wrinkles here and there in the market -- I think working with a very small sum, there is an opportunity to earn very high returns.

 

But that advantage disappears very rapidly as the money compounds. As the money goes from $1 million to $10 million, I'd say it would fall off dramatically in terms of the expected return -- because you find very, very small things you're almost certain to make high returns on. But you don't find very big things in that category today.

[One Idea]

Thanks for the input.  And thanks to JBird for putting the Buffett statement into context.  I found this link that aggregates some of his statements about the 50% return … http://valuevista.blogspot.com/2007/06/warren-buffett-50-returns.html

 

What I thought was interesting was that he researched every company in Moody’s early on in his career.  He would recommend the same to any manager starting out with a small amount of capital, saying that the “bank of knowledge” would do him or her terrific good over time.

 

Just goes to show that, although 50% returns with small sums is possible, few will do the work required to uncover the opportunities.  It's probably less about being smarter than the competition and more about outworking them.

[JBird]

Just goes to show that, although 50% returns with small sums is possible, few will do the work required to uncover the opportunities.  It's probably less about being smarter than the competition and more about outworking them.

 

Hear, hear.

[Palantir]

If Charlie and I had $500,000 or $2 million to invest, we'd find little things we could do, not all of it in stocks.

 

I thought the bolded was interesting.

 

 

Really makes me wonder what I'm doing investing in GOOG, MSFT, and AAPL.

[DoddDisciple]

few will do the work required to uncover the opportunities.  It's probably less about being smarter than the competition and more about outworking them.

 

Absolutely true. I'm trying to start an international portfolio of net-net and net-cash stocks, and suffice to say, you can't just take screen results at face value. For example, F, M, and Z scores within something like screener.co can differ since a lot of international companies only file yearly or twice per year.

 

I'm going to start with FT screener with some novel basic screens like P/B less than 1, less than 0.5, and P/E less than 5. I'm not too familiar with each country or exchange's EDGAR equivalent, so I am hoping that the data listed on Financial Times is pretty reliable in aggregate for these beasties.

[oddballstocks]

Just goes to show that, although 50% returns with small sums is possible, few will do the work required to uncover the opportunities.  It's probably less about being smarter than the competition and more about outworking them.

 

Hear, hear.

 

This is key, just showing up is 90% of investing in micro caps.

 

There are a LOT of tiny companies, it's a matter of numbers.  Go through enough of them and eventually you'll turn up the gems.  Knowing how exactly to look is difficult.  I have adopted a new routine in the last month or so, each Monday I look at ALL the financials for companies that have reported to OTCMarkets in the last week.  Most of them I open, and after 2 seconds of scrolling and skimming close and move on.  A few I linger on, and a few more go into the research pile.  It's all a numbers game, I have seen enough money losing resource companies with crazy capital structures to last a life time, but the prize for sifting through those is finding a little company selling at 75% of BV and 5x earnings.  I think I went through 90 companies or so today, it took maybe 35-45m at the most, I found one company that was moderately interesting, nothing to look at further...until next week...

 

Get a list of some market, or some stocks that qualify for something and just start charging through.

 

A last thought, for anyone wanting to put numbers to this, after going through a few thousand stocks I would say that about 5% of any list is actually worth researching, and maybe 1-3% is worth investing in.  When you start you'll spend a lot of time on companies that seem good, that is until you've looked through a few dozen and get the rhythm down, then you can move quick.

[orion]

Good post about PD-Rx Pharmaceuticals at Alpha Vulture : http://alphavulture.com/2013/11/04/pd-rx-pharmaceuticals-obvious-cheap/

[matjone]

For some of these that don't report to the SEC but do post reports on their website, I am thinking of tracking them with changedetection.com.  Anyone tried this?  Or do any IT people know if this will work reliably?

[NeverLoseMoney]

I use ChangeDetection for some sites and it works well for very simple webpages. It is not useful in other situations, for example when you're tracking a page where annual reports are posted, but where that page also includes a list of links to industry news that automatically updates every day.

 

It should work fine for the PD-Rx site, because the annual reports page is a static HTML page.

 

It looks like they downloaded a free template for their site: a link to the template directory is at the bottom of the page. For most companies this would be a red flag for me, but here I get the impression that the company just didn't want to spend any money on their website design. If the website is not important at all for their business this is OK, but in most cases it makes no sense to risk putting off some of your customers with a poor website design just to save a few hundred bucks.

[Ham Hockers]

Re: PDRX 2012 AR

 

"Our net worth increased this year to $8,356,459 from $8,171,709 in 2011"

 

Just nitpicking, but this is wrong. That's their total assets, not net worth.

[JBird]

Thanks for the input.  And thanks to JBird for putting the Buffett statement into context.  I found this link that aggregates some of his statements about the 50% return … http://valuevista.blogspot.com/2007/06/warren-buffett-50-returns.html

 

What I thought was interesting was that he researched every company in Moody’s early on in his career.  He would recommend the same to any manager starting out with a small amount of capital, saying that the “bank of knowledge” would do him or her terrific good over time.

 

Just goes to show that, although 50% returns with small sums is possible, few will do the work required to uncover the opportunities.  It's probably less about being smarter than the competition and more about outworking them.

 

"If you are managing only $1 million, then you should be able to beat the S&P 500 by 10 percentage points with no risk or leverage." - WEB. Dec. 8, 2013 at University of Maryland

[DW1234]

Where do you find the financials for these? They're not on OTC markets or the SEC website....do you have to contact the firm for an AR?

 

Sometimes you need to buy a share and call the CFO.  Seems like a pain doesn't it?  It is, but where information is hard to get it's extremely valuable.  It's very hard to have an informational edge on Pfizer, but to have one on Thermwood Corporation you just need to spend a few cents for a share and call the CFO.

 

Bump.

 

Can it be argued that the people buying these type of stocks all go through the trouble of getting their financials that there isn't as much edge as you think there is?

 

I find it hard to believe people just buy companies being completely in the dark about their numbers.

[oddballstocks]

Where do you find the financials for these? They're not on OTC markets or the SEC website....do you have to contact the firm for an AR?

 

Sometimes you need to buy a share and call the CFO.  Seems like a pain doesn't it?  It is, but where information is hard to get it's extremely valuable.  It's very hard to have an informational edge on Pfizer, but to have one on Thermwood Corporation you just need to spend a few cents for a share and call the CFO.

 

Bump.

 

Can it be argued that the people buying these type of stocks all go through the trouble of getting their financials that there isn't as much edge as you think there is?

 

I find it hard to believe people just buy companies being completely in the dark about their numbers.

 

I think there is this notion, especially on here that "everyone is doing it, the edge is gone." 

 

I've looked at shareholder lists for micro caps.  Out of the thousands of shareholders for a given company maybe 100-150 are micro cap value investors.  So the "smart money" is maybe 15% of the shareholder base. 

 

I don't know the odds, but if you were playing a game where you knew more than 85% of the participants wouldn't that seem like some sort of an edge?

 

I'll also be the first to admit.  In today's market you want to avoid microcaps.  Purchase the tech stars of the world, the Tesla's, then sit back and count your cash.  Work isn't rewarded in the market anymore and value doesn't work either.