Catalysts In Deep Value Investing

In value investing literature as such as How To Be A Stock Market Genius by Joel Greenblatt, there is often that talk, or rather that question “How fast can my returns come?”. Simply put, where is the catalyst? The catalyst is sometimes hard to explain to others but in general, can be defined as a cause for accelerating returns to the investor.

I would like to propose a that deep value investing, especially for net current asset value investing requires no such insight as to what the catalyst may be. I mean I have to admit in all honesty that I am no Joel Greenblatt and I think many of us aren’t as well. After all, he racked up 50% per year for a decade. Such returns are few and far between. And of course, when Joel Greenblatt speaks, investors tend to listen. But coming back to my point on knowing what the catalyst is.

In deep value investing, especially net current asset value investing, the  catalyst is the low low price that one is buying into. When a company has been battered by the general stock market, is a small to mid sized firm in terms of market capitalization and has little analyst coverage, the company can be profitable and still trade at low prices to its total asset value. Why may that be? Very simply, undervaluation tends to be over exaggerated in the markets and so does overvaluation. An example is the astronomical valuations of some the technology stocks of our era.

Since companies are occasionally wildly undervalued in terms of valuation, astute investors can take advantage of these low prices and bet on the reversion to mean. What is this reversion to mean? The reversion to mean is a phenomenon whereby events that happen in a large random sample tend to approach a statistically significant mean when the sample size is large enough. The coin flip experiment says it all. Flip a coin 10 times and you may get a skewed result of perhaps 3 heads and 7 tails. Flip a coin 100000 times and you will tend to get 50% of those attempts as heads and 50% of those as tails.

So in the case of buying deep value stocks, there are instances where the market is forward looking and even though the company may still be loss making, share prices turn upwards in a huge and drastic and unimaginable way. An article which I wrote elucidates this matter. Read more on Creative Technology here , a once down an out company with tremendous cash burns and an unexpected share price jump of 500%.

In simple terms, what we are saying is that previous loser stocks as signified by steep share price declines tend to do better in the future and previously winner companies as signified by steep increases in share prices tend to fare worse in the future. Academic research has shown this to be true. And so, the long and short of this is, you want to be on the right side of things.

For deep value stocks, they are usually considered loser stocks which no one wants to touch. Brokers and brokerage firms do not want to have anything to do with that because liquidity is low. A firm with a small capitalisation of $80 million may not bring in a desired level of brokerage commissions for a brokerage firm that covers it. So, these brokerage firms typically would cover a larger behemoth such as Walmart and Amazon. Even better, coverage of what’s hot would bring in the commissions. But as you may see, that will not do an investor any good.

So coming back to deep value stocks. Again, I say, there is no need to go out there and look for a catalyst in a deep value firm. Unless of course you are intellectually curious and want to spend a disproportionate amount of time going through filings after filings, decoding intention and psychology.

How About The Anticatalysts?

Your bet is a bet on mean reversion and that is enough to make you earn a double digit annual return that will be the envy of other investors. If I may offer a suggestion, if there is even such a concept of an anticatalyst, look out for that. Anticatalysts produces low low prices as seen in deep value stocks. Be sure to buy in a period of anticatalysts. When normalised conditions resume, normalised conditions will perhaps be the catalyst to improving stock prices. There are examples of anticatalysts in many of our books. The company could perhaps suffer from a one time impairment of its assets or a company in as cyclical an industry as iron ore suffers from falling commodity  prices. These are examples of anticatalysts which retards the upward movement of stock prices and caused stock prices to fall. And of course, when the descent begins, investors should sit up and take notice.

As always, may you be blessed with prosperity, health and happiness! Thank you for reading. If you feel that you have friends that will benefit from this message and if this message resonates with you, kindly share this article. We are deeply appreciative of that for search engine optimization is truly not our domain of expertise. And you may want to look at an  Australian company that doubled in a year!

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Junkyard Net Nets From Japan : Leader Electronics Corporation 6867 > 100% Profit In 6 Months

A 10 Bagger Net-Net – A Look Back At Barratt Developments PLC : A Net-Net In 2008-2009

Paying Up For Growth: You’d Better Know What you Are Doing

Books On Net Current Asset Value Investing : Case Study Driven

These books which I have written are case study driven and discuss strategies, mindsets and situational approaches to employing the net current asset value strategy. So often, we see studies talking about the net current asset value approach. But what about the psychological aspects to net current asset value investing? What happens when the stocks that you buy, while trading at less than two-thirds of liquidation value falls further by 20% to 30%? What are the numbers besides just looking at the price to net current asset value ratio? How about the issues surrounding debt? And what about management? Are they trying to survive? What are the factors which makes a company survive and thrive again and what are the factors that causes multi-baggers in net current asset value stocks? All this and more, I hope to answer with some of my experience and certain real world case studies that teach you how to find the next 200%, 300% or 1000% of returns! Clue to the 1000% returns, they are often highly leverage situations. How does one take advantage of all of that? In this website and in some of our books, we hope to try to demystify multi-bagger stocks from a net current asset value perspective.

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I have been an investor for 15 years now and my journey has meandered from Warren Buffett to Ben Graham. My start, like many, really was the naive idea that Buffett's skills could be replicated in some fashion. I was proven wrong when some of the supposed stock picks that I chose had dismal performances. Then, I learnt that it is no point trying to be someone I am not. Gradually, through failure and some success in deep value investing, my approach towards stocks gradually shifted to an approach based around Graham's techniques. So, I give credit where credit is due and to Ben Graham, I and many other investors around the world, owe him a great deal. So, if you want to read up on biographies, read about Ben Graham. His seminal work, Security Analysis is a gem. My books are just rich interpretations of what he has taught.

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