Newsletter - April 13th, 2024

Dear Reader,

Attached is our latest list of stocks passing value screens (below net current asset value, tangible equity, etc.), which don’t meet our investment criteria - and our reasoning.

This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.

For reports of stocks that pass our quantitative and qualitative standards:

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Asset Value Investing: Investor Chronicle Interview

Some notes on an interview with the fund manager of 'Asset Value Investors' (AVI) below:

1:15 Process

- Focus on neglected/overlooked areas of the market where there are pricing inefficiencies due to illiquidity, complexity, lack of research, laziness, etc.

- Good quality businesses trading at discounts to asset value; and

- Catalysts to unlock value including activism.

8:15 Fund NAV Discounts

Discounts of 20%+ to the net asset value of closed investment funds tend to be attractive purchases.

Benjamin Graham advised his nephew (who was getting into the brokerage business) to buy closed-end funds at 15% discounts on average - and he would "start ahead of the game and make out alright".

Moreover, you want time to work for you and not against you i.e. with earnings accruals, dividends/repurchases, and appreciation of intrinsic value - while you're holding the asset.

17:15 Characteristics of investments

"Cashflow generation, gearing, quality of the business, low valuation" - similar to traits we seek.

19:00 Japan

Japan still offers plenty of stocks trading at discounts to asset value.

2023 was a "transformational year" in management attitudes toward shareholders - for the better - particularly due to regulatory pressure and a policy of 'naming and shaming' managements that are out of step.

AVI focuses on stocks with large proportions of their market capitalization in cash. We cover several such stocks in our reports.

24:30 China

AVI avoids China because the discounts to asset value may be justified as the state could expropriate private property.

The attitude of the government towards private property is crucial in determining investment results.

Further, the political temperature cannot be completely ignored. History is filled with examples of expropriation (including revolutions) where fortunes evaporate overnight.

25:45 Portfolio construction

The fund invests bottom-up in 15-25 names and doesn't feel the need to be in specific areas like "emerging markets".

An individual investor doesn't need much more for diversification - though he is likely to find many more attractive opportunities due to smaller size.

Though you do maximize your chances of success if you can own more stocks with similar expected values, it's worth remembering that you only need to be right on the ones you invest in.

Our focus will continue to be on stocks that offer substantial investment value that meet our rigorous tests. (We invest in all of them, though weightings differ.)

27:45 Selling policy

AVI sells when they find opportunities with better expected values or can get exposure to the underlying asset on better terms.

As Sir John Templeton advised: Sell only when you've found a significantly better bargain to purchase.

30:00 Catalysts

Shareholder-oriented managements are important in resolving discrepancies between price and value.

Though we don't look for specific catalysts (overwhelming value is sufficient), we try to confine ourselves to managements with a minimum level of shareholder orientation - as we are too small to change an existing situation.

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For reports on the best investment values in stocks worldwide:

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Wish you an excellent week ahead.