Sunday, August 23, 2009

Investing in net-nets

In this post I talk about net nets. These thoughts also apply to stocks trading below net cash (market share < cash - all liabilities), below net current assets (market share < current assets - all liabilities) or below book value.

My philosophy is to buy only (marginally) profitable net-nets. Money losing net-nets usually continue to lose it until they have no more. There are some exceptions to the rule but not many.

Couple other rules:

- Avoid perennial net-nets. Usually if they haven't found a way out in 2-3 years, they never will.
- Definitely avoid biotech net-nets unless you know how to invest in biotech, which is completely other set of rules compared to regular investing. (Chinese medical companies don't count here, since they are usually distributors + nutrition companies, so they don't operate in USA biotech model).
- Avoid obsolete or near-obsolete technology net nets. If they could not figure out how not to become obsolete, they won't figure it out now. (There are some exceptions: KONG and HRAY did very well, but then they are Chinese companies with opportunities appearing even if tech is rather obsolete).
- Avoid distributor, 1-2%-margin net nets. 1% net margin IS the reason why they are net nets and they won't change.

Of course, with all these rules, you may guess how many net-nets I can find to buy. Right. Zero.

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