By Net Net Hunter
I don’t look at ROE or ROA… and I rarely look at profit margins. I find earnings projections or market leadership completely uninteresting… and industry analysis a bore.
The only thing that matters to me is how near death the patient is.
That’s right — near death…
How to Make Tiny Uncertain Returns
If you want the best returns possible, then I advise you to run as quickly as you can from great situations.
Most investors don’t have the stomach for real value investing. It’s true. Most people who call themselves “value investors” are really just growth investors in disguise. Sure, value and growth may be joined at the hip, but when you’re buying into situations where certainty is being sold at a premium and growth is nearly assumed to be a scientific law, you can only achieve mediocre results over the long term at best.
Certain situations often prove to be fatal while real opportunity is hiding where most people fail to look.
In order to make tiny uncertain profits in investing, look for the best companies with good expected growth rates and then hold those companies for the long term. Go ahead, do it. You know you want to.
Leave the largest yearly returns for real value investors.
What the Real Value Investors are Doing
Let me tell you a secret about investing.
This isn’t as much a secret, actually, as it is a fundamental fact that many retail investors fail to realize: if you want large investment returns with any certainty then you have to buy into situations where pessimism and skepticism are the norm.
My company is going to go bankrupt? Good.
People will never use this firm’s services again? Sounds peachy.
I’ll do my own research and draw my own conclusions, thanks.
The worse the public thinks the situation/strategy/management/political situation/economy/market is, the better the hunting grounds are. The complete opposite is true, as well. The better the public thinks the situation looks, the poorer the prospects for profit.
Real value investors are patiently waiting for your gem of a company to slip up and break your heart (not to mention your 401k). Real value investors are patiently waiting for you to hand over your ownership stake in the company you once loved for a fraction of its real world value. Real value investors pray on your pessimism, and avoid your infective exuberance like rabies.
And real value investors will grow richer for it.
Think Strategy if You Want to Win
The key word here is the word “think”.
Most investors don’t actually think — they feel. Most investors feel good when they see a wonderful situation. Most investors feel great thinking about how solid their DCF analysis is. Most investors feel as if firms suffering problems are too risky to buy into. Most investors feel more comfortable as part of the herd.
It amazes me that investors don’t spend more time figuring out what investment strategies actually work well… and then just use them.
The best investment candidates are stocks which are either loathed, unloved, ignored, or feared. These stocks have explosive potential and are exactly what I send readers who requested free net net stock ideas. Sir John Templeton’s advice was dead-on when he said to buy at the point of maximum pessimism. It’s at this point that prices have been driven down to their most depressed levels and the only direction left to go is up.
While actually nailing that exact moment with any regularity is impossible, his principle is sound. Perception and reality are two different things — and unloved, feared, or hated stocks get battered ruthlessly based on public perception/emotion. If you can dig down to get a better