How to Exploit Japanese Net Nets: The Twinbird Experience by Evan Bleker — Net Net Hunter

I’ll admit, my curiosity was immediately sparked when I first heard the term, “Japanese net nets.”

The idea of investing in these mythically value stocks in a country as intriguing as Japan was very alluring, but I had serious reservations.

For one, would the devastating performance of the Japanese stock market only lead to large investment losses? Would the relative ignorance of Benjamin Graham prevent Japanese net nets from rebounding back up to full valuation like net nets do in the West?

And, probably most importantly, how would I deal with the Japanese language barrier?

It’s been about 6 months since I began investing in Japanese net nets, and by now I’ve more or less tackled these issues. If you’re as curious as I was about stepping into these stocks, let me give you a window into how I view this unique investment opportunity.

Why Japanese Net Nets?

It’s no secret that NCAV stocks do fantastically well as a group — a fact that the 1500+ value investors who requested free net net stock ideas know well. Benjamin Graham himself wrote in the Intelligent Investor that a typical investor can expect returns at least around 20% per year over the long run. The studies that I’ve read have all shown returns well above that figure, however, with some ranging all the way up to the high 30s — and my own portfolio has blasted past the market over these past 4 years at around 30% per year.

Net net stock investing is both simple and profitable, so long as you have the temperament required to buy into deeply depressed situations.

But the general unavailability of net net stocks during market peaks is also well known. In fact, if you’re just investing in the USA, you can count on net net stocks opportunities almost totally drying up at the upper reaches of a bull market. Past a “normal” market PE, using the strategy becomes problematic. There just aren’t enough issues to put together a well diversified portfolio, or enough higher quality net net stock opportunities that would justify a more concentrated portfolio. In fact, most of the US net nets available at the time of writing this in September 2014 are either totally illiquid, Chinese reverse takeover scams, or have other major barriers that prevent purchase.

Japanese Net Nets
US Price to Book Ratio from 2000 to 2014. At a current Price to Book of 2.69x, there’s little in the way of net net stocks available.

When you decide to employ Ben Graham’s famous strategy, it becomes very clear very quickly that you have to branch out internationally in order to fill your portfolio. Hence Japanese net nets.

When it comes to deep value opportunities, no other market offers the type of opportunities that Japan does. Japan’s financial markets are enormous. When you combine their size to the depths that they’ve sunk to over the last 30 years, you end up with a market that provides a massive number of good quality NCAV stocks.

Right now on our Net Net Hunter Stock Shortlists, we’ve narrowed down roughly 200 Japanese net nets to highlight the 12 best opportunities available. Those twelve make up 31% of the stocks on our Net Net Hunter Investment Shortlists (out of 39 shortlisted stocks, total), and are generally of much better quality.

Japanese Net Nets
Price to Book Ratio of stocks in Japan from 1980 to 2014. The Japanese markets are CHEAP, which has opened up a lot of opportunities for deep value investors.

Did Ben Graham Travel Overseas?

According to a couple of our Japanese members, Benjamin Graham is not widely known in Japan. He’s just not popular.

With that type of disinterest, one of my big concerns about investing in Japanese net nets was that — maybe — value stocks in Japan would underperform, or at least would not have the same kind of performance as value stocks in the West. In the West, there are a lot of investors hunting for bargains. When bargains are found, investors tend to bid prices up, eliminating most of the investment’s margin of safety in the process.

Absent that general mindset, would Japanese net nets just kind of float motionless at the bottom of the market? Or, at least, would it take so long for Japanese net nets to get noticed and bid up in price as to negate any advantage that net net stocks have to offer?


A recent paper by James Montier has shown that Japanese net nets do work out very well. Just like their western counterparts, Japanese net nets decimated the Japanese indexes from 1985 to 2007 by 15% per year! That’s 15% ABOVE the index’s 5% return on average over that time period — for a meaty 20% CAGR.

To put that into context, over the same time period American net net stocks beat the index by 18% per year. Obviously any concern about Japanese net nets not working out due to disinterest was misguided. Japanese net nets compare very well to net net stocks in the West.

Breaking the Language Barrier

Another concern was my total inability to work in the Japanese language. Since most firms in Japan publish Japanese language results only, a lot of the typical information that value investors use to identify a potential investment is just not available.

Before you buy a typical value stock, you comb through the 10Ks and proxy material with a laser guided magnifying glass in order to uncover those tiny details that might give your portfolio an edge. It takes a lot of reading and digging to find an opportunity.

By contrast, investing in NCAV stocks is all about playing probabilities. It’s a sort of contrarian strategy. Since the population of net net stocks work out very well, you should be able to just buy a large diversified group of them to approximate the returns of the population. Over your holding period, some of your stocks would work out and some would suffer losses, but the overall result would be very good.

To give yourself an edge, you could look for characteristics that have been associated with outperformance: the lowest possible price relative to NCAV, buying firms without debt, looking for insider buys, etc. Essentially, this is the strategy that I’ve taken with our Net Net Hunter Investment Scorecard. When it comes to how I invest in net nets, reading the annual reports is important, but mostly to double check the balance sheet figures and to identify qualitative elements on our Net Net Hunter Investment Scorecard that will help give my portfolio an edge.

But, you wouldn’t need to comb through the annuals to uncover a lot of the desired information. Consolidated English financials for Japanese stocks are available online, and you can easily spot favourable Debt to Equity Ratios  or share buybacks using a firm’s financial statements, for example. News releases can be translated through Google services, and English translations of press releases are published online by 3rd parties.

In short, you can get enough of a picture using the available information to tell whether ant particular stock is likely to be a better than

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