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.

When Buffett approach is preferable to Graham

I recently read through "The Cashflow Quadrant" of the "Rich Dad, Poor Dad" series. The book itself is not great, but it has a reminder of why Buffett approach to investing is preferable to Graham. Quote: "Are you a true business owner? ... Can you leave your business for a year or more and return to find it more profitable and running better than when you left it?".

This is what distinguishes Graham investing that is in the S quadrant (self employed, trading your time for money) to Buffett investing that is in B/I quadrants (business owner/investor, trading someone else's time for money). With Graham investing you have to follow the market. Not as much as traders do, but still you cannot leave for year or two and expect that things will work out. With Buffett investing, like he says, even if market is closed for 5 years, it does not matter. The businesses owned will grow and prosper to better results through this time.