Graham and Dodd on low priced stocks and volume

This post is a series on Graham and Dodd's wisdom applied to Japan.

For further reading click links below:

Benjamin Graham - Inflated Treasuries and Deflated Stocks

Benjamin Grahm - Should Rich Corporations Return Stockholders' Cash?

Benjamin Graham - Investments on the Balance Sheet

Benjamin Graham on Depreciation

Graham and Dodd - Discrimination in selecting net-net stocks

One of my main concern regarding my investments in Japan is corporate governance, e.g. corporate action, that doesn't align with the interst of the shareholders.

My second unease is (or better said was) the trading volume in some of my holdings, especially in cases of net-net stocks or close to net-net stocks, where aggregate value of the stock is low in relation to tangible net-assets.

Here is what Graham and Dodd in the 1934 edition of Security Analysis has to say about this issue:

Chapter XLI (Page 473 ff)

"Low priced common stocks...possess an inherent arithmetical advantage...can advance so much more than they can decline."
"...give the owner the advantage of an interest in, or "call upon", a relatively large enterprise at relatively small expense."

"...most people who buy low-priced stocks lose money on their purchases....bulk of the low priced purchases made by the public are of the wrong kind, i.e. they do not provide the real advantages of this security type...(they are) low priced in appearance only....."

"A genuinely low-priced common stock will show an aggregate value....small in relation to the company's assets, sales, and past or prospective profits."

"...companies facing receivership are likely to be more active than those which are very low in price merely because of poor current earnings. This phenomenon is caused by the desire of insiders to dispose their holdings before the receivership wipes them out, thus accounting for a large supply of these shares at a low level...."

"But where a low-priced stock fullfills our conditions of speculative attractiveness, there is apt to be no pressure to sell and no effort to create buying. Hence the issue is inactive and attracts little public 
 attention."

Conclusion

 

Instead of seeing low trading volume as an anomaly in the case of net-net investments, it should be seen as inherent in such special situation investments. Therefore, instead of beeing agitated by low trading volume
in such shares, it should rather be embraced and seen as a (technically) affirmation, that the selected low price issue is of the right kind.