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Finding Enough Investment Ideas

Upon seeing that The Avid Hog is a monthly newsletter, someone asked this question:

…how do you expect to find suitable candidates every month? Is the supply of good companies that large?

The supply of good companies is enormous. If you don’t have any restrictions on market cap or country, there are always good companies out there. Supply is never the problem. Knowing that supply well enough is.

Although I consider myself a value investor, I don’t get ideas the way most value investors do. You can see a good example of how a value investor looks for ideas in this video of Michael Price’s presentation at the London Value Investing Conference. Another good example is this quote from Nate’s latest post at Oddball Stocks:

I value banks like I value companies.  I find a bank that’s clearly undervalued, then I work to either confirm or deny the valuation.  This is the opposite of someone who might research and value a company and once the valuation is done look at the market value.  I start with the market value, I’m not looking for franchise companies, I’m looking for companies that appear cheap, and I want to confirm they actually are cheap, if so I invest.  This means I don’t have a Watchlist of banks or companies I’d like to buy if the price were right.  Rather I continually trawl low P/B stocks and pick up what’s on sale that week or month

Let’s contrast that with the ideal I strive for. In a perfect world, my approach looks more like how Warren Buffett described his analysis of PetroChina to Fox Business. He told Fox Business the important parts of his approach are that:

1. He tries to look at the business first, without knowing the price
2. He decides what he would pay for the entire company
3. He compares the price he would pay to what the entire company is trading for in the market
4. If the price he would pay is a lot higher than what the whole company trades for in the market, he buys it.

That’s the ideal approach for me. I’ve found personally that it’s the one that works best. If I appraise the entire business with fairly little preconception of where the stock should trade, has traded, etc. and then I compare my appraisal to the market price I’m on the firmest footing in terms of knowing I have a bargain.

The hypothetical I often pose when talking to Quan about a stock is:

Imagine you are running a family holding company. The assets of all your family members are tied up in this company’s stock. You can put 25% of the value of your holding company into buying this business in its entirety. Would you do it?

In other words, is this a business you want to be in forever? Is the price good? And would you be willing to put 25% of the money of the people you care most about into it?…

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How Did Mohnish Pabrai Not Make Money in Japanese Net-Nets?

This is a serious question. I’m probably not qualified to answer it, because I have a poor understanding of Pabrai’s investment approach.

Here is the blog post that stumped me:

The Pabrai funds invested in a basket of Japanese (net-nets) starting October 2010. Mohnish has exited all the positions with a realized gain of 2.2% including dividends, or 1.4% annualized.

The notes go on to give examples of some stocks Pabrai owned:

Examples include Hibiya Engineering and Ryoyo Electro. Both were trading below NCAV at the time of his investment, generating profits as well as positive and consistent cash flows. Managements of both companies were also repurchasing shares. Hibiya ended up just a little bit profitable and Ryoyo turned out be a -15% loss.

I can’t explain Pabrai’s experience with Japanese net-nets. But I can tell you a little about my own. We have two records of it. One is personal (my own account where I actually bought net-nets and made money). The other is public (a paid report I put out on March 21st, 2011). There is a third record you should check out. Go to Nate Tobik’s Oddball Stocks and read all his Japanese net-net posts. These three experiences are more indicative of what individual American investors would have gotten out of their Japanese net-nets.

I won’t talk a lot about my private record, because it’s private. You can’t verify it. But it’s better than the public record I’m about to show you. Instead of picking 15 Japanese net-nets, I went with no more than 5 at a time. I ended up buying a total of 6. I started with 5 and then added one later to replace a stock (Sanjo Machine Works, which is on the list) that was bought out. Like always, I concentrated a little more than other investors might. In this case, that got me a better personal result than the more diversified group I’m about to show you.

So let’s talk about that group of 15 net-nets. Let’s talk about the public record.

I published a (paid) report on Japanese net-nets on March 21st, 2011. So we have a list of 15 Japanese net-nets we can look back on without the usual biases of a hypothetical backtest. This is an actual observation. We’re working off a dated PDF that went out to buyers.

Here are the returns (in Yen) of those 15 Japanese net-nets since March 21st, 2011.

Zaoh (9986): 84%

Fuji Electric Industry (6654): 23%

Mitsui Knowledge Industry (2665): 28%

ASICS Trading (9814): 82%

Sonton Foods (2898): 47% TAKEOVER

Nisshin Electronics Service (4713): 33%

Daito Gyorui (8044): 9%

Sanjo Machine Works (6437): 186% TAKEOVER

NJK (9748): 67%

Noda Screen (6790): 62% TAKEOVER

M.O. TEC (9961): 41% TAKEOVER

Yasuhara Chemical (4957): 1%

Techno Associe (8249): 71%

Kawasumi Laboratories (7703): 12%

Seiko PMC (4963): 83%

Now, the Yen has fallen 18% against the dollar since March 21st, 2011. So, we will factor that into our results. Taking the currency loss into consideration, here are …

What is The Avid Hog?

The Avid Hog is a monthly value investing newsletter written by Geoff Gannon and Quan Hoang. It is best suited for buy and hold investors looking for an above average business at a below average price. Each month, Geoff and Quan pick the best buy and hold stock they can find. They discuss that one stock in a series of 9 articles. These 9 articles – each over 1,300 words long – include separate sections on the 7 points that make up Geoff and Quan’s personal buy and hold checklist:

1. Durability
2. Moat
3. Quality
4. Capital Allocation
5. Value
6. Growth
7. Misjudgment

In addition to 12,000 words of written analysis, each issue of The Avid Hog includes:

1. Historical financial data
2. Owner earnings calculation
3. Intrinsic value appraisal
4. Margin of safety measurement

The goal of each issue is to provide subscribers with enough information – in the form of facts, quotes, and data – to make their own decision about the stock. Unlike many newsletters, the focus of The Avid Hog is business analysis. The intended minimum investment time frame is 3 years. The stocks profiled are the same stocks that Geoff and Quan are researching for their personal accounts. Geoff and Quan have agreed to limit all future purchases to stocks that have appeared in The Avid Hog. This ensures the idea flow subscribers are seeing is identical to what Geoff and Quan are thinking when it comes to their own money.

The cost is $100 a month.

At The Avid Hog, we do not offer trial periods. Nor do we make old issues available for free. However, you may sample the current issue of The Avid Hog. Sampling is done on the honor system. You do not need to enter your credit card information. Just call or email Subscriber Services and ask to be sent the current issue. If you are satisfied with your sample, please come back to the site and pay for the product you just enjoyed by clicking the subscribe button. If you are unsatisfied, think of it as an (unwanted) gift.…