I don’t have perfect foresight but I believe that the net current asset value approach will continue to work in the foreseeable future. For one, I see that the advent of technology has deteriorated our morals and have made us addicted to efficiency and impatience. Now, isn’t patience a virtue needed to be a good investor? All one has to do is to look around and you will find evidence of a deteriorated nature within us human beings. Our smartphones have made us addicted to instant information. Uber, Netflix and many other on demand companies have made it their business to satisfy our addictions with the touch of a button. That is also the reason why many investors are inclined to fast paced trading using technical analysis. For some reason, they believe that money is best made fast. Impatience is the name of the game for traders. Not surprisingly, the markets appeal to their greed. And we could make the argument that impatience is a subset of greed. That “I want it now” attitude is being nurtured by society and today’s corporations.
Will human nature change? Perhaps. But if we are talking about human nature changing for the better, that is a low probability there. The following are reasons why I think that investing in net current asset value stocks will still continue to be fruitful strategy.
Human beings have undergone no change with regards to our biological make up. The will and instinct to survive is coded into our blood. As such, the flight or fight syndrome is a real issue for many investors. These tendencies and the tendency to think and act collectively plays out in the stock market. For many investors, the fortitude to buy when there is blood on the streets will be a real challenge.
Also, the best time to buy is when stock prices have priced in all the bad information. Typically such stocks have ugly charts that point 45 degrees downwards to the right. Most investors mistake temporal issues for permanent issues. Impermanence is a law of life. If one is looking for certainty, investment results will be mediocre. If one is looking for great investment results, bearing temporary uncertainty is a must.
The Love Of Large Caps
The retail crowd is generally a lover of large and popular companies. These are the companies with the most analyst reports being churned out. There is sort of a cyclical loop when it comes to such matters. Sell side analysts and brokerage firms know that the bulk of their revenues will come from the most liquid, high volume stocks with large market capitalizations and make recommendations around these stocks. It does not matter if they are buy or sell recommendations. All that matters is that a trade occurs. At the same time, these stocks are for the most part quite fairly valued.
The smaller capitalised company with a market capitalization of just $150 million, trading at a price to tangible book ratio of just 0.5 is totally ignored. How is that possible? That is because sell side firms will not be able generate much trading commissions from such stocks.
Charlie Munger terms it as the incentive caused bias. Incentives cause a whole lot of distortion in the financial industry and a whole lot of pain to investors who do not know any better. A classic example is the subprime financial crisis.
Impatience. Aren’t we all guilty of this to a certain extent? I don’t think I need to speak much more about this. Looking out for the next hot thing will do us in. The fear of missing out is a real fear. But with wisdom and discernment, an investor can moderate that innate tendency.
The Fixation On Earnings
Growth in earnings will always be a significant factor in the movement of stock prices. When earnings increase, the ability to pay down debt and give dividends increase. The problem occurs when the market is disappointed in the earnings growth numbers. Even worse, losses will cause stock prices to plunge. By looking at net-nets, we are looking at stocks with prices that are very near the bottom. The earnings are secondary because all expectations about them have been removed from the market. And not to mention, these stocks are trading at such low prices to the assets.
The Inability To Deal With Uncertainty
Did I mention that have a need for certainty when it comes to investing. That need for certainty is what would cause investing results to be mediocre. Well, if you want certainty, chances are that you will be drawn to the many analyst reports churned out by your broker. As a result, you would fall into a group think mentality. Group think is a real issue when it comes to investing. When you find your peers agreeing with you all the time, chances that you have fallen into group think.
If you want to win in the game of investing, it is good to know that not many agree with your decisions. This of course presupposes that you actually know what you are doing.
This is not meant to be exhaustive. Let me know if I can add more to all of this. As always, may all readers be blessed with abundance, happiness and health!