Our story is our philosophy and yet the philosophy, we have to say is greater than our story. For the investing philosophy of TheHolyFinancier is one of the investing gods. May I say “gods” with a uncapitalised “g”? Who are these investing gods one may ask? They are those that have gone before us and have succeeded in an unimaginable way. These are the giants on shoulders which we stand from.
Benjamin Graham
I would be the first to say that without having been formally introduced to Benjamin Graham and security analysis, my investing results would have been mediocre. After much experimentation on Ben Graham’s methods, I have to say without a shadow of doubt that Ben’s methods do really work. We give credit where credit is due. And to Ben Graham, wherever your soul is right now, we have immense gratitude in our hearts for you contributions to the investing world.
Walter Schloss
If I may say so, Ben Graham has not been given the credit he so deserved. He had created an entire field of security analysis and has indirectly or directly had an impact on many of the greatest investors the world has ever seen. He was also instrumental in making Walter Schloss, the investor he was. These individuals have been grossly overlooked in our opinion. They have racked up track records which are the envy of investors the world over.
And what is this method that underlies the philosophy? Ben taught many things. But to us, the most appealing strategy was the net current asset value method of stock selection within the repertoire of deep value strategies. The idea is to have a hard look at the tangible assets and to make haircuts to these assets in a way that proved conservative and then to purchase at a low price to these adjusted assets. The net current asset value approach ignored all fixed and non-current assets, and focused on the most liquid assets in a company, namely, the current assets. Shrinkages in the value of the current assets are covered or protected by the value of non-current assets. This is the idea behind the net current asset value approach.
And of course, this simple strategy has got its naysayers. There have been one too many times when I personally have been snubbed when it came to buying companies at prices less than two-thirds of the net current asset value. It is perhaps a method that is so simple and profound at the same time that investors do not comprehend the depth of the strategy. With a simple quantitative value, one is able to avoid groupthink, herd mentality, the institutional investors with enormous wads of cash and what Warren Buffett calls “The institutional imperative”. And a natural progression of using the net current asset value approach is to become a contrarian. In general as I have seen, most investors want to become contrarians but are afraid to. For one, they may be afraid of being laughed at. And another reason is that they may suffer from the “deprival super reaction”.
The net current asset value approach is quantitatively sound and for all intents and purposes, makes a good contrarian tool. In fact, in my opinion, an investor could just practise this approach and stick to the process and come out way ahead in terms of returns as compared to your mutual fund manager. You are not compelled to believe this but academic research and backtests have shown this to be true. To put it in sexy terms, to me, this strategy is the $20 million blueprint. I have written about that in some of my books on Amazon and within these books, I have written about numerous case studies on companies which have met this criteria. And in my experience, it was worked very well.
Another vantage point of the net current asset value approach is this – It forces one to look at companies which have been beaten down. Companies which have been beaten down and have low prices to its estimated liquidation value or the net current asset value really are companies which have been exposed to the vagaries of the economic cycle. And did we mention, most of these companies have no “moat”. At the same time, these companies usually have a priced in “This company is doomed!”.
On the other hand, some of these companies may have temporary problems which can be fixed and have low levels of debt. Survivability is not an issue for many of the companies which we shortlist. The uncertainty regarding earnings is what puts investors off. With the numerous case studies on this site and the books I have written, I hope to shed some light on why investing in periods of uncertainty is not the same as investing in risky stocks. Risk is probable and permanent loss of capital. Uncertainty on the other hand has a totally different meaning. Do not confuse the two words. You may be uncertain about a company’s earnings growth over the next fiscal year but if you know what you are doing, what you should look at and what you should not look at, you know that the company is most likely safe and cheap.
From an Economics 101 perspective, it may make sense to look at it this way. What has fallen will rise again and what has risen may fall someday. In the stock markets as well as in life, nothing is certain. If if there is any certainty about a stock which you are about to invest in, you are most likely paying a really really high price for that security. When net profit margins of a company are supernormal, it tends to attract some serious competition. These companies may suffer from declining numbers and deteriorated return on equity and net profit margins. As such, stock prices react accordingly by declining. In companies that are loss making, they trade at a low price to its assets. As some of these highly indebted companies cease to be going concerns, the remaining survivors will at some stage being to thrive again.
This is one of the critical laws of demand and supply. It is practically Economics 101. And of course, this is reality. Please read more about some of these case studies here. The idea then is to take advantage of Mr Market and react to it only when it favors you. If it does not favor you, you have the undeniable right to not do anything. Now, this is simple but not easy. I could easily write a 10,000 word essay on this but I would most likely bore you to death. Instead, you will find it nested within some of the pages of this site.
We encourage you to stick around and have an open mind. The net current asset value approach may be what you need. We will leave you with some words to ponder on. And that is, if you find your peers agreeing with your investment opinions, that means more likely than not, your investment results will be mediocre. On the other hand, if you find many disagreeing with you and if you have acquired some serious skill in what you do, perhaps, you are on the right track – beating the markets will come naturally.
May you and your family be blessed with abundance, prosperity and happiness!