What is a net-net?
- net-net investments were first discussed in literature by Benjamin Graham, the so called "father of value investing"
- it's an opportunity situation in the financial markets, similar to distressed asset investments (e.g.situation where a firesale depressed certain assets to a level, where you can buy a dollar for 50 cents.)
- in the case of stocks = situation where liquid assets on the balance sheet of a company (Cash, receivables, inventory) minus all liabilities are substantially worth more, than the market capitalization of a publicly traded company. All other assets (fixed, intangible, (longterm) investment securities) are ignored in valuation process.
- Graham first observed this phenomenon during the great depression of the 1930's and published its observings in an article asking "Is Wall Street worth more dead than alive?" (=buying the whole company; ordinarily liquidating the business ==> instant gain for investor)
- it's a situation (e.g. stocks) perceived by many as risky; but not holding fundamental (quantitive) facts (although could be risky in terms of liquidity risk; beta)
Why so many net-nets (=qantitity) in Japan, although no fire sale (compared to the 30's occured lately)?
- firesale in Japan stretched over time; took place over a period of +20 years; decline in its magnitude comparable to the 1930's(peak to trough)
- quite unique macro situation in Japan
- overall market in Japan very depressed ==> many companies undervalued, which are no net-nets in Graham's sense
Why so little attention to net-net situation in Japan?
- general lack of interest for stocks from within and abroad
- difficult to play for smart money (nationally + internationally) ==> liquidity inadequate
- difficult to play for little (smart)money (high transaction cost + even for them illiquid market)
- disclosure issues for smart as well as little (smart) money; lack of japanese and understanding for JGAAP
- corporate control issues (==> poison pill; Keiretsu)
What about quality of japnese net-nets?
- usually net-nets are money loosing business ==> no growth; money loosing; dividend cut; share issues ==> time works against you: ==> importance that special situation turns around quickly (e.g. take over (corporate control): share buy back; special dividend; management buy-out, etc.)==> market punishing you for patience
- many net-nets in Japan high quality
- many don't carry interest bearing debt on their balance sheet
- in Japan often not money loosing, but profitable, but not dynamic ==> paying dividend; buying back shares; but no growth ==> market rewarding you for patience (very uncommon in our times)
- current asset composition often very favourable (==> loads of cash&short term investments and accounts receivables; combined with little inventory)
- mildly positive to positive free cash-flow trends
- often corporate governance issues (poison pill; dominant shareholders)
What about the currency risk?
first of all, with a net-net mindset you`re primarily buying a stake in a company (=partial business owner) and not a currency (==> business has to be good, not the currency). With a foreig net-net you are secondarily buying into a foreign currency. What to watch out for?
- you are buying into a currency, where (kind of) democracy rules (very important in our times)
- buying into a country where the rule of law is in place (and not a mafiocracy)
- by the way mafiocracy and rule of law == > lawyers ==> in japan very few (most lawyers in international trade affairs); in business trust more important
- buying into a currency, where country is one of the most important world creditors
- buying into a country, where (official) debt/ gdp ratio is one of the highest
- buying into a currency where real interes rates are positiv (almost extinct in the rest of the world)
- buying into one of the few currencies, that has maintained its purchasing power over the last 25 years
http://undervaluedjapan.blogspot.de/2012/04/why-i-do-not-hedge-my-currency-exposure.html
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