Home » Value Investing

Mansei Corp – Your Free Net Net Stock Pick; Inside One Of Value Investing’s Greatest Minds: Chris Browne

Updated on

Mansei Corp – Your Free Net Net Stock Pick For January by Evan Bleker – Net Net Hunter

In this issue…

  1. Inside One of Value Investing’s Greatest Minds: Chris Browne
  2. Hunter Deep Value Fund: 2015 Performance
  3. Mansei Corp – Your Free Net Net Stock Pick For January
  4. Don’t Sweat the Coming Market Crash

Inside One Of Value Investing’s Greatest Minds: Chris Browne

Beating the stock market is actually quite simple, so why do most investors find market-beating returns so elusive?

The success of value strategies has been well documented for at least the past 60 years. It’s no secret, now well into the 2010s, that beating the market is as simple as putting together a diversified portfolio of value stocks and rotating those stocks when they appreciate back up to fair value. It’s baffling, then, why so few people actually take advantage of this very simple strategy, despite the evidence.

In a speech given to the Columbia Business School in 2000, Christopher Browne, managing partner at the legendary firm Tweety Browne, offers up some insights into this phenomenon.

In more recent years, two schools of thought as regards investment have emerged that we believe do have significant merit to the investor. The first is highly empirical and is based on a body of work, principally academic studies, that show that stocks outperform bonds, and value outperforms both growth and the popular stock market indices over long periods of time. We have collected 44 of these studies in a booklet entitled What Has Worked in Investing, which we are happy to provide to any present or would-be investor. The overriding conclusion of these studies is that value investing provides superior returns compared to all other investment styles. The second body of recent academic studies deals with the question of why the vast majority of both professional and individual investors ignore this empirical evidence when making investment decisions.

Many economists maintain a heroic ability to cling to the idea of man as a rational wealth maximizing being, despite real world evidence. The evidence is especially obvious in the field of investing, where investors consistently commit large investment errors. In the field of investing, Man acts like anything but a rational, wealth maximizing being.

The truth is that few money managers take the time to figure out what works and develop a set of investment principles to guide their investment decisions before setting out to manage money. This is an issue that Charlie Munger spoke about brilliantly in an address where he spoke of the need to develop models to guide our behavior. Without models or principles, one is just flailing in the dark and mistaking luck for success.

Failing to think deeply about your investment strategy before investing money can doom your portfolio to years of under performance, as it did the portfolio of one of Chris Browne’s personal friends, who insisted on buying bonds as a way to “avoid losing money”. He should have just invested with Tweedy Browne.

Over the ensuing 10 years, I calculated his municipal bond portfolio would have grown to $1,140,226 at a assumed interest rate of 5%. If the same funds had been invested in the Standard & Poor’s 500 Index, he would have $2,906,639 before taxes at a 15.3% annually compounded rate of return. If this investment was taxed at a 40% rate, his after tax nest egg would have grown to $2,023,983. His “loss” for not being invested in stocks was $883,757. However, since the loss was really only an opportunity cost, he did not feel it. Moreover, it is unlikely he would have had the stomach to stay invested after the crash of 1987. In explaining our friend’s behavior, psychologists have found that the disutility of loss is twice as great as the utility of gain.

As in the case of our friend with the municipal bond portfolio, the frequency with which an investor checks his investments plays a significant part in his or her level of risk aversion. As stocks go down on nearly as many days as they go up according to De Bondt and Thaler, stocks can be highly unattractive if they are observed on a daily basis. Other behavioralists have estimated that if an investor’s time horizon was 20 years, the equity premium would fall to 1.5% from 6% as there is very little chance an investor would experience a loss after so many years, and stocks would be a much more appealing investment.

But investors don’t view their investment horizon nearly as long as they should. As Chris Browne describes, this long-term view becomes critically important when looking at the actual performance of even the most gifted value investors — or value investing firms such as Tweedy Browne itself.

Eugene Shahan analyzed the investment records of the seven managers presented by Warren Buffett in his debate with Michael Jensen. Shahan found that despite the fact that all seven managers outperformed the S&P 500 extraordinarily, none of the managers outperformed it every year. Six of the seven managers underperformed the S&P 500 between 28.3% and 42.1% of the years covered. Often, the periods of underperformance lasted for several years in a row. In the case of Ruane, Cunniff’s Sequoia Fund which has produced a total return of 12,500% versus 4,900% for the S&P 500 from inception through 1999, it experienced declines of 39% in the 1973- 74 period, and 30% in 1979-1980. Periods of such underperformance would have resulted in termination by all but the most convicted value investor.

A rational approach to large consecutive losses?

Not really.

If investors had just stuck with their investment manager despite the significant losses they suffered over those periods they would have handily beaten the market when it came to retirement. Part of the conviction to stick with the manager would have come from the manager’s strategy and his investment decisions themselves, not by the results of those decisions. After all, we can only control our own actions.

But most investors wouldn’t have stuck with those managers, despite the great long term results. The fact is that investors tend to extrapolate extremely short trends well into the future, constructing a prediction that’s as inaccurate as it is rosy or dismal. Ironically, this very tendency may be partly responsible for the success of value investing strategies in the first place. Browne continues

[Lakonishok, Schleifer and Vishny, and their paper, Contrarian Investment, Extrapolation and Risk]… conjecture that the superior performance of value strategies versus what they call “glamour” or growth strategies is the preference for glamour strategies over value strategies by both individual and institutional investors based on their predisposition to extrapolate recent past performance with future performance.

Even when investors suspect a turnaround may eventually occur, they’re still hesitant to act,

The allure of more immediate gratification also plays an important part in investors’ stock preferences. Value stocks often take longer to work out than investors who are seeking more immediate, abnormal returns are willing to wait.

Confidence and the preference for short-term gains are, understandably, joined at the hip. If investors are confident that they can extract a bit of profits without waiting, why hold on for an eventual bump up in price, even if that capital gain is highly likely to occur? Much better to make your money where big gains are next to come than to play probabilities with cheap stocks, right?

The same tendency towards over confidence exhibits itself in portfolio turnover rates, which are largely a result of attempting to “time the market.” ……In a paper written by Brad Barber and Terrance Odean of the Graduate School of Management at the University of California, Davis, the authors found that over- confident investors trade more and make less. The greater the trading volume, the poorer the returns.

…which can only be explained by the inability of the vast majority of investors to predict which way a stock, sector, or market will move before the movement takes place. Ironically, this is exactly what most investors aim to do – an activity that amounts to little more than gambling.

It is possible that the behavioural tendencies displayed by even professional investors are almost impossible to overcome. It often takes an unusually insightful and introspective person to even recognize the behavioural shortcomings he has, let along act to correct them.

And this brings us back full circle. Why don’t investors take advantage of value strategies when the evidence points overwhelmingly to large long-term returns? As Chris Browne sums up,

The most obvious question that arises from this discussion is why investors, both individual and professional, do not change their behavior when confronted with empirical evidence which more than suggests that their decisions are less than optimal. One answer offered by Lakonishok, et al, is that being a contrarian may simply be too risky for the average individual or professional. If you are wrong along with everyone else, the consequences professionally and for one’s own self-esteem are far less than if you are wrong and alone in your choice of action. Sometimes called the herd instinct, it allows for the comfort of safety in numbers. The other reason is that individuals tend not to change courses of action if they are happy. Individuals can be happy with sub-optimal results so long as they are not too painful. Moreover, individuals who tend to be unhappy and prone to making changes often do so for the wrong reasons and end up being just as unhappy in their new circumstances. Resistance to change and the fear of failure may simply be forces too great to overcome.

Hunter Deep Value Fund: 2015 Performance

Hi There,

Are you excited about the large drop we’re seeing in the global stock markets so far in 2016?

If not, you probably need to make a mental shift. A lot of investors feel terrible when they see their portfolio drop, especially if it’s a large drop over a short period of time. Benjamin Graham, however, had a different view of price movements.

If you’re a value investor, then you should be well aware of Graham’s view on Mr. Market, and the implication that price drops have on your investment behaviour. Ultimately, investors should see a major price drop enthusiastically, since stocks are essentially “put on sale”. After a market drop, you can buy more of the stocks you love for cheaper prices, scooping up the same amount of value for less money.

An inflated stock market has a major drawback: the higher stock prices are relative to value, the lower future returns will generally be. With a Shiller PE of 26x earnings, the American stock market has been set up for tiny, if not negative returns, going forward. A large market drop corrects that, and sets up great returns going forward.

Luckily, I haven’t invested much in the American markets this year. A lot of my fund has been invested in Japan which, although trading for a high Shiller PE, is trading for a pretty low price relative to Book Value. That opens up a lot of spectacular net net stock investments.

With the rapid drop in world markets in 2016, a lot of high quality net net stock opportunities are opening up. Really, if you’ve been waiting to put together a high quality net net stock portfolio, there’s no better time to join Net Net Hunter. For more information, Click Here.

My Performance in 2015

2015 was a tough time for the American markets. After a 5 year bull run, for example, the NASDAQ only returned 4.17%. The Russell 2000, less known but a better benchmark for my portfolio, was down -6.5%. As terrible as that return was, it was nothing compared to the -31% drop in the micro cap portion of the Russell 2000 Index.

Against that background, I’m extremely happy with the Hunter Fund’s performance for 2015. Over the year, we were able to beat both indexes with a return of 10.5%.

2015 Returns:

  • NASDAQ: 4.17%
  • Russell 2000: -6.5%
  • Russell 2000 Micro Caps: -31% (As at Nov 2015)
  • Hunter Deep Value Fund: 10.5%

Note that the Russell 2000’s Micro Cap section is the most directly comparable to the Hunter Deep Value Fund because I almost exclusively invest in Micro Cap stocks. Unfortunately, it doesn’t include international Micro Caps… and my portfolio is currently 100% invested outside of the USA.

Also keep in mind that while I’m giving performance for the calendar year 2015, my Fund’s fiscal year ends in February.

Some investors make the mistake of thinking that the 25%+ CAGR return profile of net net stocks means that net net stocks will rise by 25%+ each year, beat the market each year, or even have a positive return each year. That’s misguided and just not the way investing works. Returns of net net stock portfolios vary year by year. Some years will be spectacular, some mediocre, and some will disappoint. Take a look below to see the variability in the returns that Oppenheimer recorded in his study. You can expect roughly the same as a net net stock investor.

Mansei Corp

Note that in the above graph net nets are shown to underperform the market during a large drawdown. In my research, I’ve found that net nets out perform the market in all but the steepest drops. When the market is flat, net nets tend to average roughly a 15% return. When the market is down 10%, net nets tend to produce a gain of 5%. When the market drops below 20%, net nets seem to match on the downside on average.

2016 may be a challenging year for investors, but I won’t sweat it. A market drop means higher stock returns going forward, and investing internationally means being able to invest in much cheaper international markets. That should help protect my portfolio against a sizeable drop in the American markets. At the end of 2015, for example, the American markets had a Shiller PE of 24.6x while the UK was priced at just 12.7x. Which do you think would fare better in a major market drop?

All the best,

Net Net Hunter

Mansei Corp – Your Free Net Net Stock Pick

When it comes to net nets, higher quality picks tend to fair better in down markets. This means net nets that are paying a dividend, or have a higher PE, will suffer a smaller drop on average than net nets as a whole and the overall market.

Let’s take a look at one of those companies now:

Name                   Mansei
Country               Japan
Symbol                7565
MT Unit               1000 Shares

NCAV/Share       1520 Yen  
Price/Share         602 Yen
Discount              60%
PE                         5.9x

Current Ratio       2.24x
Debt to Equity     3.6%

Burn Rate YoY     26% incr
Burn Rate QoQ    <1% decr

Warren Buffett always used to talk about buying dollars for 50 cents. Well, here’s $1 on sale for just $0.40.

Mansei Corp. is an electronics and machinery manufacturing and wholesaling company founded in 1947 that is currently based in Osaka, Japan.

The company primarily sells machinery for business and industrial use, but also for construction and residential use. Machinery includes industrial automation machinery, power distribution machines, as well as elevators and escalators. The company’s electrical products include high-density memory solutions, microcomputers, as well as video and multimedia systems. In April 2013, the company created a new solar power subsidiary with the aim of entering the power generation business.

Mansei is probably the best buy available in Japan today. I bought it at about 750 Yen per share, so the company has come down somewhat since my purchase. It has also, on the other hand, increased in NCAV per share by a large amount year over year and is consistently profitable. When you factor in its ultra strong Balance Sheet and very low PE ratio, you get a very attractive opportunity.

Important DisclaimerPlease remember that the stocks mentioned here are not recommendations for investment. I mention them purely as recommendations for your own further research after which you must decide for yourself whether the stock is worth investing in or not. All investments are subject to risk, including total loss of capital, and these stocks are no different. While I send these in good faith, any one of these stocks could lead to significant losses.

Graham’s net net stock strategy is a statistical investment strategy so investment success depends on putting together a diverse portfolio of good quality net net stocks. A net net stock investor always aims to have his portfolio work out well as a whole, while remaining indifferent as to the success of any one stock.

Also, keep in mind that I have personally invested in many of the stocks that I mention here, so readers should assume – unless clearly stated otherwise – that I own shares in any company mentioned.

Purchasing shares and then recommending them to others to drive up the stock price is a common scam known as front running. I offer these stock picks in good faith and since 2013 I have yet to see the price of any stock recommended here advance meaningfully within two weeks after sending out our monthly stock pick. If you have doubts about my intentions, don’t purchase the stock.

Don’t Sweat the Coming Market Crash

Investors are understandably worried about a coming market drop. The last recession we had, in the dark days of 2009, almost left the US on the dustheap of history. With markets now well into their 7th year of this abnormally long bull market, many of the structural problems that triggered the 2009 crisis unsolved, and the Chinese market scare only a month behind us, it’s no wonder that investors are jittery.

But a market drop is one thing, and investing quite another. A market drop does not necessarily spell disaster for an intelligent investor. If investors maintain a long term perspective, they should be even less worried.

But can you go one step further and avoid large market drops altogether? If you could, your returns would definitely improve since you would be taking advantage of all of the positive years and sidestepping the down years completely.

So, is it possible to time the market to avoid market drops?

Caution From the Greats

If so, I’d definitely adopt that strategy. The problem is, all of the advice that I’ve come across from great investors has advocated against trying to time the markets. Here are some of the best I’ve read…

Peter Lynch

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

Walter Schloss

“I am not good at market timing, so when people ask me what I think the market is doing, their guess is as good as mine.” Link

Seth Klarman

“In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.”

Warren Buffett

“You know, people talk about this being an uncertain time. You know, all time is uncertain. I mean, it was uncertain back in – in 2007, we just didn’t know it was uncertain. It was – uncertain on September 10th, 2001. It was uncertain on October 18th, 1987, you just didn’t know it.”

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

Charlie Munger

“I’ll take someone any day who just says “I don’t know” what an individual stock or the market as a whole is likely to do (near-term and even much longer) over those who are willing to make prognostications. Better to just expect difficult market conditions from time to time and realize that those difficulties may look nothing like those of the past; maintain reasonable but conservative expectations then end up pleasantly surprised if things go a bit better.”

Benjamin Graham

“The last time I made any market predictions was in the year 1914, when my firm judged me qualified to write their daily market letter based on the fact that I had one month’s experience.  Since then I have given up making predictions.” Link

With names like that making such critical comments on market timing, it’s no wonder I’m skeptical. But it’s not just the investment legends that steer me off of trying to time the markets, the research seems dead-set against it, as well.

Studies Show…

It’s one thing to advise the little guy not to try to time the market, like your parents trying to advise you not to drive too fast when you first get your license, but can the pros themselves time the market successfully?

Apparently not. In “Mutual Funds: Risk and Performance Analysis For Decision Making,” John Haslem summarizes the research done on mutual fund managers to get a sense of how well the pros can time the markets to boost their overall returns. What he finds isn’t confidence inspiring, to say the least.

Of the 13 studies cited, none found that mutual fund managers could time the market — that is, get out of the market before a big drop and into stocks before a rebound — to any extent at all. What managers did do this successfully couldn’t do it consistently and most market timing managers were subject to significantly more risk.

How much more risk? Failing to time the market correctly could decimate your returns. According to Haslem, the maximum downside risk is twice as large as the maximum upside potential. Not only that, but managers would need a minimum 69% accuracy to beat a buy and hold strategy! They would have to be right 7 of 10 times! Being right 100% of the time to avoid a market drop, but only timing market re-entry right 50% of the time, would have still underperformed a regular buy and hold strategy…

As one of the study authors quipped, “Despite the overwhelming evidence against timing, it — like alchemy before it an astrology to this day — still boasts devoted followers.”

When it comes to net net stocks, you really have to be in the game when those good years happen or you’ll inevitably underperform. The same goes with the S&P 500. One of the studies cited by Haslem found that of the 64 years covered, large market surges were concentrated in only 55 months — 7.1% of the months studied were responsible for most of the S&P 500’s return!

Another dark finding is that market timers have a bad tendency of getting out of the market after it has fallen, and into the market after it’s already surged. This causes a market timer to not only suffer the large drop, but miss the inevitable bounce back up in price!

Can You Use Market Valuation, Such As The Shiller PE, To Dodge Market Drops?

Tobias Carlisle is best known by his popular blog Greenbackd. In fact, he’s one of the few people who were influential in helping me jump into net net stocks with both feet.

On the blog, Tobias publishes research that he’s conducted on different value investing, including a great pair of articles which examined the impact of trying to use the Shiller PE market valuation method to try to time the market. From “Worried About a Crash?”:

“Can an investor concerned about a big crash use a systematic timing tool to exit the market before the crash without giving up too much return? One possible method for doing so is to use the Shiller PE as a valuation tool, and to move the portfolio into cash at some given level of overvaluation. The backtests below show the returns and drawdowns for exiting at four different levels of the Shiller PE ratio, from aggressive to conservative.”

Tobias’ chart shows the market performance, as well as the performance of a low Price to Book value strategy that’s always fully invested. Compared against those two are 3 strategies that exit the market in favour of holding cash. The first of those, the “Mean” strategy, exists the market as soon as the market rises up to its historic average Shiller PE ratio. The next are more aggressive, with the “1 Std. Dev.” exiting the market at 24.8x, and the “2 Std. Dev.” strategy at 32x.

Unfortunately for market timers everywhere, the fully invested strategy outperformed throughout the test. Let’s look:

Mansei Corp

In the above test, the fully invested low Price to Book strategy returned 20.01%, while the returns of the other strategies were directly correlated with the extent to which they were out of the market. The Mean strategy earned 13.4%, while the 1 Std. Dev. earned 18.15%, and the 2 Std. Dev. earning 19.36%.

Tobias then looked at what would happen if those strategies hedged the market to profit from a drop, and then only stepped back in after the market dropped back to various low valuations. The compound returns were nearly identical:

Fully Invested 20%

Sell at 1 Std. Dev., Buy at -1 Std. Dev. 15%

Sell at 2 Std. Dev., Buy at Mean 19.3%

Sell at 1 Std. Dev., Buy at Mean 15.9%

He also tried Graham’s 75-25 stocks-bonds strategy, but found that it also significantly underperformed a simple buy and hold strategy.

Mansei Corp

Tobias was only able to beat the regular buy and hold strategy through a complex interplay between using leverage, selling out at a standard deviation of 3x, and then hedging the market on the way down — but even then the strategy only beat the market by 1.9% per year …and it was still subject to large drops in portfolio value from time to time. In other words, despite the complexity investors still couldn’t avoid a drop in the value of their holdings.

So much for using valuation to time the market.

Multiple Markets, Multiple Valuations

The goal of liquidating in favour of cash to avoid market drops ignores another key consideration: which market are you talking about?

Modern first world markets are robust and corporate governance is reliable. Whatever edge the US enjoyed throughout the last century has been completely eroded. When hunting for high quality net net stocks, there are a number of markets to choose from and all offer net nets that a deep value investor can pick up.

What’s more, different global markets are also priced differently. The Canadian and American markets, for example, while closely related in geography are not all that close in terms of valuation. At the end of August, 2015, the US had a cyclically adjusted PE of 24.1x and a Price to Book value of 2.7x. Canada, on the other hand, had a CAPE of 18.3x and a PB of 1.8x. And, just for kicks, Japan had a PB of just 1.4x.

So, no matter your strategy, there’s always a depressed market out there somewhere.

When It Comes To Market Timing, Here’s What I Do

It may be cliche to say but, when it comes to value investing we just try to buy cheap stocks. That’s really what it comes down to.

We don’t try to predict market moves or position our portfolios based on market valuations. We just try to fill our portfolios full of the highest quality net net stocks on offer.

It just so happens that high quality net net stocks are found in large depressed markets, so the bulk of our portfolios end up being invested in cheaper markets anyways, sidestepping a lot of the risk that domestic-only investors subject themselves to.

Right now, most of my portfolio is invested in Japanese net nets trading at roughly ½ of net current asset value, are growing that value along with earnings, and are also priced at PE ratios around 8x. You won’t find those kind of stock in your home market.

So, what’s the market going to do going forward?

…who cares?

Start putting that strategy in practice today. Click Here to request free net net stock picks and start earning 25%+ annual returns.

Leave a Comment