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Newsletter - March 30th, 2024 (Note on NCAV stocks)

Dear Reader,

In addition to high-quality businesses selling at low multiples of earnings, we will also be studying the universe of net current asset value ('NCAV') stocks - as a separate category.

We consider the vast majority of NCAV stocks to be un-investable, but in conjunction with other appropriate rigorous tests of value, we expect to find a few investment bargains. Moreover, smaller investors can exploit their advantages fully in this category due to the generally small size of these stocks, and limited competition.

This category may require wider diversification due to the lower quality of the businesses but the limited downside risk and the potential for significant appreciation should offer profitable opportunities as a group. [We shall mark these stocks as 'NCAV' next to the company title in our reports.]

Attached is the latest list of stocks passing value screens (below net current asset value, low EV/EBITDA, low P/E, 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:



Some notes from the last month:

Fundsmith AGM

11:45 Learning from underperformance

If you didn't own any of the 'Magnificent Seven' US technology stocks in 2023, it's likely that you would've underperformed the S&P 500 index.

Smith highlights the cyclical nature of such performance, and the importance of adequate diversification as an important psychological (and business) tool.

It's probably best to focus on intelligently allocating capital as best you can - and let the markets take care of themselves. Over time, a conservative small investor can expect fruitful results - say, 15% or better (including dividends) - which should outperform market averages over long periods of time.

40:15 Market timing

Smith presents a fascinating chart showing the long-term performance of portfolios excluding the best 10 to 40 days in the last 20 years. The difference is stark.

The case for staying invested in stocks (at whatever % the investor is comfortable) is strong.



2:30 Five-year law of value investing

A five-year term tends to be the shortest period to judge results from value investing - for the market to act as a weighing machine and either confirm or disconfirm your differentiated thesis.

4:45 Don't get hung up on industry stereotypes

Buffett acolytes tend to parrot his blanket statements on certain industries (e.g. Airlines) - whereas he is prepared to change his mind when industry economics change (such as railroads in 2009).

Also, technology-intensive stocks can be good buys when bought cheaply and carefully - especially on a group basis.

14:00 Low multiple businesses

Pabrai recounts using Benjamin Graham's value investing techniques during the dot-com boom (funeral homes at 2x earnings, steel mills at 3x earnings, etc.) - a comfortable strategy for smaller investors.

20:00 Be a Harsh Grader

Try to throw out stock ideas as fast as possible - whatever doesn't die is worth further study.

26:00 Inactive markets

An inactive stock market tends to be fertile ground for investors - regardless of data availability today versus a century ago. Overreactions to business developments present investors with profitable opportunities.

32:00 Ipsco

Ipsco is a good example of a low risk/high uncertainty combo - once your risk is minimized, it can be worthwhile taking your chances on the future.

Ipsco was trading at 2x free cash flows (net of cash) - with confirmed orders for the next two years covering the capital outlay for the operating business.


Gottesman on Buffett

19:30 Counting railcars

Part of Buffett's 'scuttlebutt' method of researching stocks when information was scarce was to count railroad cars going in and out of the STP (car engine additive) factory - to get a sense of business volumes and the size of STP.

36:30 Sees' pricing power

The key insight Buffett had when paying ~3x tangible book for See's candies was that it had pricing power - he raised product prices every year after Christmas.


For reports on the best investment values in stocks worldwide:


Wish you a Happy Easter and an excellent week ahead.


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