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  • tim bug 2012-03-05 18:12
    Thanks Geoff. Im interested in learning more about net-net investing. Where should I start? I'm working on some ideas, I am from the Philippines, but currently I am in the UK. I am looking at some real estate companies there, I think they are quite cheap trading around 70% of book value. Ill try to  get some figures and let you know what I find. Thanks again.
  • Geoff Gannon 2012-03-05 15:25
    tim bug: " I try to "prove" the current stock price is clearly lower than the stock's intrinsic value conservatively calculated." That's a
    Please feel free to write me anytime about anything.

    I love getting questions. So if you ever have any, just ask.
  • Geoff Gannon 2012-02-29 12:49
    tim bug: Hi Geoff, I have only around 2350 dollars to invest, would you suggest I invest everything in a net-net portfolio? From what Ive read from your posts
    I don't do a DCF model. I did work on designing an automatic valuation tool for GuruFocus. And you might see that here on the site at some point. But it's not meant to get the correct value for a complete analysis. It's just a tool that can be used on any stock with just 10-year financial data available and approximate the intrinsic value. For your own investments, it is always better to dig deeper - beyond the things a computer can measure - and look at the company itself. I use different approaches for different companies. Usually, I don't try to get the right intrinsic value. Instead, I try to "prove" the current stock price is clearly lower than the stock's intrinsic value conservatively calculated. This is not quite the same thing. For example, a stock trading below book value only requires you to prove the company is clearly worth more than book value to justify buying it. You don't have to calculate EXACTLY how much more than book value it is worth. If it's 1.5 or 2.5 times book value matters, but it's not strictly necessary that you're sure which is the right value. If you like the industry, company, management, culture, etc. and you paid 90% of book value and you think it's worth either 150% of book value or maybe even well over 200% but you're just not sure - it doesn't matter. If it's worth 50% more than you paid today and it's safe and growing nicely, you can buy it and hold it without actually figuring out its intrinsic value.

    As far as what I did when I helped create an automatic intrinsic value appraisal for GuruFocus, that simply took into account:

    1. Normal Earnings
    2. Sustainable Growth
    3. Dividends
    4. Interest Rates

    Exactly how you calculate each of those variables is tough detail work, but the principle is sound: a stock's value is based on its earnings, growth, dividends, and the level of interest rates. That's all.

    But you always have to focus on the really obvious situations. The fast growers, the high dividends, the companies with unusually low earnings this year that are likely to rebound at some point. For probably 8 out of 10 stocks you'll quickly come to the conclusion that intrinsic value as best you can calculate it is too close to the stock price for you to make a clear buy/sell decision. Maybe 1 out of 10 times you can feel strongly a stock is probably too cheap and maybe 1 out of 10 times you can feel strongly a stock is probably too expensive. You could be wrong even in those cases. But around 4 out of 5 times you don't even need to do a calculation to see the stock price is about right. Since other people probably know as much about most stocks as you do, I'd avoid delving deeply into stocks that appear priced in the right general area of their intrinsic value. Instead, focus on things that just look odd to you. Like a high quality, 10% a year growth company trading a little over 11 times earnings. That seems wrong. Whereas a really lousy company trading around 7 times earnings or a really wonderful company trading around 25 times earnings - those are often cases that are simply too close to call.
  • Geoff Gannon 2012-02-29 12:37
    tim bug: Hi Geoff, I have only around 2350 dollars to invest, would you suggest I invest everything in a net-net portfolio? From what Ive read from your posts
    Thanks for the question. It's a good one.

    Unfortunately, $2,350 is not a lot of money to invest in net-nets. Even if you use a discount broker like Scottrade it will cost you about $7 to buy each one. If you want to make sure that you don't spend more than say 2% of the portfolio each year, you can't spend more than about $50 a year on commissions for your whole portfolio. Spending more than 2% of your assets a year on broker fees, etc. will drag you down too much. If you think about this, you'll see that you can't hold more than about 5 stocks or so using $2,350. In other words, you really want to be able to put at least $500 into each stock. I'm not sure you want to only have 4 net-nets. So, if you mean that you only have $2,350 to invest and can't save more each month - I would definitely not invest in net-nets. Since you can't diversify while keeping broker fees low.

    If you could save - say - $500 a month, then you could invest in net-nets at a steady rate each month or quarter or whatever you can do. But if you aren't planning on saving more each month and putting it into your account, you shouldn't go with net-nets. You should invest in high-quality companies. Something like Wells Fargo, Microsoft, etc. I can give you a list of names of stocks that would make sense. You should put about $500 to $600 into each of 4 stocks. And you should just buy and hold them. This will keep your portfolio expenses reasonable if you use a discount broker.

    Net-nets are best for someone who is adding $500 a month to savings. They'd be perfect for someone like that. Even just $2,000 a year being added to savings would work because they could put $500 into a net-net every 3 months. In a few years, they would have a diversified portfolio.

    But something like 4 net-nets is not enough.

    Look for buy and hold investments instead.

    Let me know if I can help.

    And thanks for the question.
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