Become Rich like Warren Buffett, the best investor in the world
4)
Ney Torres: [00:00:01] Today, we have a very special guest, Evan
Bleker. Did I pronounce it right?
Evan
Bleker: [00:00:07] Ah,
yeah. Pretty good. I’m not particular about that.
Ney Torres: [00:00:10] So we've been talking through mail for
the last couple of years. And Evan, it's such a pleasure to have you here. For
the people listening, if you are going to stay for the next 30 minutes, you're
going save yourself a lot of headaches for the next 10 years.
[00:00:28] If
you’ve ever thought about investing in stocks, this is really the path to go
through because Evan did something really really smart. And that's, he took a
model, a role model like Warren Buffett, who's the best investor in the history
of humanity it looks like, and he started looking at what he did when he
started out versus what he did eventually. Right? Because most people, and you
call this, they fall in the Buffett trap, right. What is that?
Evan Bleker: [00:01:01] Well, the Buffett trap is the idea that
you can simply top Buffett's current method of investing, and it will work
really well for you. A lot of people, they read about Buffett, but they don't
necessarily go past, you know, CNBC articles or the Berkshire Hathaway, you
know, a couple letters here or there or interviews with Warren Buffett.
[00:01:25] And Buffett
is investing right now very differently than how he did when he had only a
small amount of money. And based on how much or how large your portfolio is,
that will kind of dictate the different strategies that you use. So, when Buffett
was starting out, he used a method that was coined by Benjamin Graham called,
the cigar-butt investment strategy.
[00:01:53] Basically,
that involved buying small beaten down companies that were trading below
liquidation value and then hoping to sell them for roughly liquidation value. He
moved past that actually to get into larger companies, so larger growth
companies, because he simply had too much money to invest.
[00:02:16] And
so, you see a lot of small investors right now and they look at this current
investment strategy and they say, “Well, this is exactly what I have to do.” So,
I would call that the Warren Buffett trap.
Ney Torres: [00:02:28] Excellent. And I found you in a period
of my life when I had the same ideas, right? Like, I was seeing that and
everybody listening, the value you're going to get from this phone call is that
you don't invest like the big guys. You actually have an advantage and a huge
advantage because this is very weird in the world of finances when you go into
stocks. When you're little, you have an advantage versus the big guy. Right?
Evan Bleker: [00:02:59] Definitely. I mean if you're a small
investor, you're managing a small pool of capital. Maybe if you're lucky,
you're around at the million-dollar mark. But most people are going to be 10,000
to 100,000 to maybe half a million. With that little money to invest, you can
look at far more opportunities than the big guys can.
[00:03:22] So,
if you look at the big money managers, they're all targeting companies that are
around a billion to $10 billion, maybe larger in market cap. But as a small
investor, you can target companies that go all the way down the market cap
ladder. So, from a billion all the way down to a million. And that just
provides a lot more opportunity for you.
Ney Torres: [00:03:50] Excellent. For the people that are
listening to this podcast, it's called Financial Freedom, right. Most of the
time I talk about real estate, but the truth is, real estate is awesome for
cashflow but there's nothing, and let me put an emphasis on this, it is nothing
like compound interest.
Evan
Bleker: [00:04:09] Yeah.
Ney Torres: [00:04:09] What Evan is going to talk about right
now is how to become rich actually. Real estate is going to take a while to put
you comfortable, but compounding? Man, that's what makes you rich. Can we start
from the beginning? How did you find this path in life?
Evan Bleker: [00:04:29] Oh man, it was a long journey. I mean I
started investing in senior year of high school. I started at a consumer
economics class in senior year. They introduced us to the stock market. It was
the late nineties so you had all these bubble companies rocketing up, you know,
15% a day.
[00:04:51] I
was a stubbornly picking stocks at their 52-week lows. The companies that were
making new lows. My friends were all buying the hot stocks. There was a bit of
a competition and I ended up losing that competition because you can't be a
value investor during a bubble period and expect to outperform. But, you know,
within a couple of years, all those companies had crashed right back to earth
and value is rocking it ahead.
[00:05:24] I
think that I really started getting started seriously as an investor after
scraping some money together and then going to my financial advisor. I asked
them for a few mutual funds that I could probably put my money in. They gave me
some options that were, I guess, the bank’s own mutual funds. And they were
just terrible.
[00:05:47] I
knew enough about investing to know when I was looking at terrible product and
they were trying to push me into this stuff. And I said, “Well, if advisors
don't want to help, then I guess I have to do it alone. I have to learn myself
and make my own decisions.” And so, that started a journey learning about
investing. There was a lot of ups and downs.
[00:06:09] I
followed some methods that weren't value that didn't work out for me that lost
me some money. I turned to value investing Buffett and Graham and I found that
those methods took so much work that it just wasn't practical for somebody with
a full-time job or somebody who was going to school.
[00:06:29] I
was actually at the point where I was going to give up on investing in about
2009, 2010. I figured that I just don't know how to do it. I just don't have
the time. And then, I stumbled on to somebody who is actively investing in Graham’s
Net Net. And I remember reading a long time ago, like five or 10 years
previously about these Net-Nets and how they are a no-lose proposition.
[00:06:58] I
think that's how I remembered it at the time. But everybody that I had read
since then had said that they were not available. They were a situation that
happened in the 30’s to 50’s and they just weren't viable anymore. But here we
are in 2010. And I'm looking at a website and the guy's actively investing in
Net Net stocks. So, I figured, “Oh, well. This is really interesting. Maybe
I'll give it another go.” And from there, the first few stocks worked out beautifully.
And then, I was off, and I've been investing in Net Nets since then.
Ney Torres: [00:07:40] Perfect. So just let me clarify
something for the people that never heard about these concepts before. What is
value investing?
Evan Bleker: [00:07:49] Value investing is the general framework
or philosophy where you assess the value of a company and then you try to buy
the company for less than that value. It's very simple. You just try and buy
something for far less than it's worth. That's essentially value investing.
[00:08:10] In
value investing, there are kind of two types/two prices or two types of value. The
first one is the intrinsic value of the company. So that's what the company
would be worth to a private very knowledgeable businessmen or to a business
people that are negotiating a private sale of a private company and have a lot
of information about that company. That would be the intrinsic value.
[00:08:39] And
then, there's the market value and that is what the market says the company's
worth. So, by market, I'm talking about the stock market and generally the
stock price of the company. Now, we want to base our decision about value on
the private negotiated transaction. So that would be the intrinsic value. And sometimes
that value can diverge wildly from the market value. So, when you see that the
market value is far below intrinsic value, that's when you want to look closer
and assess the company and decide whether you want to buy it or not.
Ney Torres: [00:09:18] Okay. So, for everybody listening, the
idea that Evan is proposing is that the stock market, the crowd sometimes is
wrong, which is not what we are taught in the university, right?
[00:09:32]
We're taught basically that there's so many people in the sub-market that the
price always has to be right because there's so many eyes on the stock market
that… Well, it's hard to find a value or… It was like walking down the street
and finding a $20 bill on the floor. Right? There are so many people walking. Why
will you find it?
[00:09:52] So
that's it. Yeah. So your paradigm, your reality is that, no, people sometimes
get scared and they run to the fences and leave these jewel in the middle of
the street, and you go and pick it up when everybody's scared. Now, you did
mention something important. And you said, a value guy is hard to beat a bull
when the market's going up. I know for years it’s hard for somebody that looks
for value to outperform, right?
Evan Bleker: [00:10:25] Yeah. Yeah. Actually, yeah. I would say
that value investing really comes down to temperament. You can teach people
value investing and they can understand it thoroughly, but if it disagrees with
them on a psychological level, in terms of their temperament or disposition,
they're not going to be value investors. You can show them that value. In
general, it has outperformed the market over X number of years. There's still
not going to be buying value stocks. So, it's very temperamental.
[00:10:59] Now,
when the market's going up and when there's a lot of bubble activity going on.
For example, American real estate or the fang stocks right now, like Facebook
and Amazon and Google. It really tests the mantle of people who are value
investors because it's kind of human nature to, if stocks are going up, you
want to join in that party. But that's also when it's the most dangerous to be
an investor. Conversely, if your value stocks are flat for a couple of years,
then that's a very challenging time. You need a certain disposition or
temperament in order to stick with the value game.
Ney Torres: [00:11:47] Indeed. So, everybody listening right
now, if you're the kind of person that goes to the supermarket and just buy
soup when there's a discount and you just load up, or when you see meat at a
discount and you just load up, you are a value investor, right?
Evan
Bleker: [00:12:03] Yeah.
Yeah, definitely.
Ney Torres: [00:12:05] So, we do the same but we do that with
stocks, which is not really that hard, as Evan's going to show, because you're going
to hear these terms but it's not really the hard. Once you learn a couple of
concepts, you can really go into a financial statement and look at a couple of
things and realize, “Oh.” For example, I'll give you an extreme example. If you
see a company and he have $1 million in the bank, but it's being sold before
half a million dollars and he has no debt, well how hard can that be? Right?
Evan
Bleker: [00:12:40] Yeah.
Ney
Torres: [00:12:40] And
that's why you mentioned that's a no-lose proposition.
Evan
Bleker: [00:12:43] Yup.
Yeah.
Ney Torres: [00:12:45] Perfect. So can you tell us, you
mentioned Net Nets. What is Net Net? Why do you like it?
Evan Bleker: [00:12:51] So a Net Net company is a business that
has a certain statistical anomaly where the company has more current assets
than it does total liabilities. And the price of the company is trading below
the net amount. So, you know, without getting too technical, the balance sheet
is broken up into your current assets and your fixed or long-term assets, and
then your current liabilities, and then your long-term liabilities. Then, you
have your equity. Now you take your current assets and you subtract all of the
liabilities.
Ney Torres: [00:13:36] We understand current assets is
everything that you can turn into cash in less than a year. Right?
Evan Bleker: [00:13:40] Exactly. Exactly. So, it's the most liquid
part of the balance sheet. So, you take that net amount and we'll say that it
nets out to 10, and then you look on whatever website you use, say Yahoo
finance, for example. And if the price of the company, the total price of the
company is five, then you have a Net Net stock. So, it's trading below that
amount. So that amounts we label net current asset value.
Ney Torres: [00:14:10] So I like to say that it's how much the
company's worth if we will die today. Would you agree on that?
Evan Bleker: [00:14:18] I would say that it's a rough real-world
assessment of the company's liquidation value. I think that's how Graham
described it.
Ney Torres: [00:14:29] Perfect. And it's more certain. Because
there's three ways to value a stock. How much is this worth if it's dead, how
much is it worth if it's normal, like no growth, and the third one is if it
starts growing like crazy. The problem with value in the company if it's
growing like crazy is that you need to be very knowledgeable and predict the
future and be certain about it.
[00:14:53] While,
doing what you do or Net Nets, it's a certainty. You look at the company that
today, how much is it worth? Is there a discount? Perfect. I go in. In your
book you mentioned three ways you make money there.
Evan
Bleker: [00:15:12] Yeah.
Ney
Torres: [00:15:13] How
can you realize value or make money once you buy stock?
Evan Bleker: [00:15:16] Sure. So, these companies are trading at
such a ridiculously cheap price because they're usually going through a
terrible situation. Maybe the business lost a major customer, or maybe it had
some product defects and it lost most of its business. And so, you have revenue
or sales fell off a cliff, and profit is not existent and the stock price is
down maybe 90%. And so, there's a lot of terror that's happening there with
investors.
[00:15:51] At
that point, the company will tend to stabilize right around or below net current
asset value generally. Some of them don't. But usually when a company
stabilizes, you look for a certain situation where there's a bit of good news
comes out or the company starts to improve its fortunes. And those things tend
to launch the stock.
[00:16:17] So,
in terms of the three things, the three factors that really lead to a revision in
market value, that would be a bit of good news coming out about the company. If
news has been terrible about the company for the last year, and people have
given up on the company and think it's going to go to zero, and then a bit of
good news comes out, well, that can launch the stock fairly high.
[00:16:43] The
second would be the company recovers as a business. And this happens, I would
say quite frequently, where things are going terribly but management is able to
pull up on the stick and get that plane pointed towards the sky again. Yeah,
exactly. And so, they'll start growing earnings or growing revenue, I should
say. And the stock will go up that way.
[00:17:14] And then,
there's also liquidation. So, if the business doesn't work out, management can
choose to liquidate the company. In other words, they'll close the doors,
they'll put all the assets up for sale, and they'll distribute those assets to
shareholders in the form of a dividend. So that would be the other way.
[00:17:33] And
then, I should say, actually there's a fourth way, and that is with a private
takeover. So, a third-party takeover of the company. A lot of the time, you
know, these companies are so cheap and they have virtually no debt that it's
very easy for an acquirer to come along and offer shareholders a price typically
in line with net current asset value. Now, I should say it's not a sure thing. They
don't all work out. That's definitely a misconception. I would say that
probably 60% of them workout fairly well if you're selecting them decently. The
other 40%, they’ll kind of stay around, maybe your purchase price. A few will
go down but the ones that go up, they can go up quite a bit.
Ney Torres: [00:18:29] So, are you buying at 60 cents on the
dollar? 66 cents on the dollar? What's your rule of thumb?
Evan Bleker: [00:18:35] It really depends. I like to get a 40%
discount. I love a 50% discount. If I can get a 60% to 70% discount. I’m dancing.
Generally, the cheaper the better. Um, but I have to qualify that because it's
not always around the discount to net current asset value.
[00:18:56] Most
of the time, what I like to do is I like to look at two other things,
stability, and then what is it about the situation that makes me think that the
company's going to do better going forward or the stock will see a higher price
going forward. So, it really comes down to three things. Your margin of safety,
we call it, that's the discount to fair value. The stability or how robust that
valuation is. And then, what tells you that the company is more likely to work
out than other net nets?
Ney Torres: [00:19:32] Perfect. You think that you will double
your money in its position. So, people can think about it as a formula. We call
it expectation in trading. You win 60% of the time. You kind of doubled your
money with your winners. And your losers, how much do you lose per loser? Do
you have a time trigger?
Evan Bleker: [00:19:59] Yeah. Good questions. I think there was a
guy, I can't remember what his name was now. Oh, Montier. Montier, I believe his
name is. I can't remember his first name but he came out with a paper and he
looked at the losers of Net Net.
[00:20:16] It
turned out that roughly 5% of Net Nets declined by 90% in value or more during
a given year. How does that compare to all stocks? All stocks come in at about
2%. So, you have a bit more risk on the downside with Net Net. Obviously,
they're struggling companies. There's a reason that people think that they're
going to go to zero.
[00:20:43] So,
there is some risk on the downside. Now in my portfolio, I haven't really seen
many of those. Luckily, I've selected fairly well but I would say that roughly
speaking, it has come in line with about 5%. In terms of the other losers. Generally
speaking, if I've lost money on a company it hasn't been nearly that much. But
there has been a couple of blow ups.
[00:21:14] On
the up side, yes, you can double your money. That happens, I would say quite
frequently. A more disappointing upside will be in the 25 to 50% range but then
you get those few outlier companies. I'm thinking of the 80% / 20% principle. You
always get a few companies that outperform or significantly underperform, but
the outperformance are the ones that do work out can be hundreds of percent.
[00:21:47] And
so, I've seen those. I'm kicking myself now because as a young Net Net
investor, I didn't have the wisdom to look at the situation and to see what was
happening. But a couple of my past picks have gone up 500, a thousand, 1500%.
And those are the ones that I kicked myself about because I sold it net current
asset value. So, I totally miss the upside there. But, yeah. Live and learn.
Ney
Torres: [00:22:18] Yup.
I lost one. A 20 bagger.
Evan
Bleker: [00:22:21] Oh, no.
Ney Torres: [00:22:23] Yes. Yes. It’s D. The reason I started
bloating up is because of big investor. The Warren Buffett from Canada started
loading, and I was one of the first people to see it. And I was like, “I don't
understand this company very well, but I'm going to just start, you know,
speculating.” So, I put 3% of my portfolio there. Until I understand the
company. And I got divorced and three months later I just closed everything. Three
months later, he was a 20 bagger and I'm like, “Oh my God.”
[00:22:58] I
want to clarify something. You mentioned Ben Graham before here a couple of
times. Ben Graham is Warren Buffett's teacher. Why the reason we were so
obsessed with Buffett is because he started with basically a ball of dust, like
$100,000 when he was 27, which today will be equivalent to, I don't know,
$900,000 probably. But he turned that into a hundred billion. It's amazing,
right?
[00:23:25] So
if we can do like a hundred thousand of what he has done, we will be really
fortunate in life. I remember reading Graham in his original writings. He was a
Dean in Columbia. And actually, I had to say, one of the few intellectuals in
finance, in stocks at least because he came up with this concept you mentioned,
the margin of safety, which he brought from engineering because his concept was
you build a bridge but you don't put in the sign, it's maximum load. If you can
handle 40 tons, you really want to advertise 20 tons just in case. So, he
brought that into finance and he said, “You don't buy a business at full value
because life is uncertain. So you really want to pay like 50 cents on the
dollar.”
Evan
Bleker: [00:24:19] Exactly.
Ney Torres: [00:24:20] Because life is uncertain. And in his
writings he mentioned he will just sell a position after two years even nothing
happened. Do you do that? And why?
Evan Bleker: [00:24:34] I used to when I was running a more of a
quantitative portfolio. There are different ways you're going to invest in Net Net.
You can take a purely statistical or quantitative approach where you buy a
basket of Net Nets that meet a certain quantitative criterion. For example,
discount to net current asset value, low debt equity. And then you can go more
qualitative. And that is reading the company, reading what management's doing,
reading what the industry's doing. And you can base your picks more on the
qualitative nature of the situation.
[00:25:16] I've
always been a blended investor, but when I was leaning more towards the
quantitative side of things, I held basically for two years if the stock didn't
go up after two years, I sold it. Generally speaking, the closer you hold it
towards the 12-month mark, the better you're going to be in terms of
statistical returns.
[00:25:40] That
tends to be the best or the highest compound annual growth rate. But leaning
more towards the qualitative side now, I realized that for a lot of these big
winners, you need to give them the time to work out. And so, you'll have a
company in your portfolio, you'll totally be convinced that the future is
bright for the company and management is doing this, and that, and the other
thing, but it's been three years and the stock hasn't moved even though the
project progressed. You just have to let that scenario play out.
[00:26:13] One
of the companies that I bought, Sang Noma technologies, that was a five bagger
I missed out on. I sold that net current asset value but they were coming out
with a host of new products, and they were buying companies to feed through
their distribution network.
[00:26:30] I
saw a net current asset value and I was out. But a few years later, eventually
the new products caught on, the new business that they purchased caught on. It
went up six times so I missed a six bagger in five years in order to get a 60%
return in a year. Yeah. I mean the tradeoff’s not that bad if you can get 60%
on all your Net Nets year after year, but that's just not the case.
Ney Torres: [00:27:02] Yeah. I'm sorry. I also realize we use
the term bagger, which means times. If you say six bagger, that's six times
your investment. Or 20 bagger is 20 times your investment. I see you're going
into what we talked before. You are strictly…
[00:27:22] An
investor starts strictly as a quantum, like seeing the numbers and have those rules
to come out, but then it turns into more into the sub valuation. More like a
gut feeling kind of investor. But the cons of time, right. And I can see you're
saying that right now. Like I should have seen farther away. But yeah, that
comes with time, right?
Evan Bleker: [00:27:44] Yeah. I wouldn't say necessarily gut, a gut
investor, but understanding the situation more and how business works. That's
something that only comes with reading and a lot of experience in business. So,
if you're managing your own business, you understand how business works, you
understand a little bit more about what could move a company's fortunes. So,
when you're assessing a net-net opportunity, you can kind of judge it a little
bit better than somebody who's, say an engineer and has never really done
business or, you know, even a finance student.
Ney Torres: [00:28:22] So let me ask you about how much
research you put into these things because… Okay, so there's two schools of
thought, right?
Evan
Bleker: [00:28:34] Yeah.
Ney Torres: [00:28:34] For example, the big problem with
studying Warren Buffett, the best investor in the world, is that it looks
really simple but it’s not really simple. The guy who reads all day long for 80
years so he's somewhat... But there's a story that somebody sent him a book,
like 10 years ago, of Korean stocks. South Korean stocks, where you are right
now.
[00:29:00] And
in an afternoon, he went into a Sunday into his office in Berkshire Hathaway,
that's his company, and just put together a portfolio, in an afternoon without
really knowing anything about South Korea and the culture and all of this. But
then again, I've seen interviews with people that had been into his office, and
there's a huge book of how to read South Korean stocks. So, what do you think
is the trick?
Evan Bleker: [00:29:32] Well, it really depends on the overall
strategy or, I call it sub strategy. The overall sub strategy that you're
using. If you're going purely quantitative, then it can be fairly quick to put
together a portfolio of, say, 20, 24 stocks, something like that.
[00:29:51] You
just go through the company's own financials and you look to make sure that the
company is trading below net current asset value and that it has whatever other
quantitative factors are in place. It could take you, I don't know, 45 minutes
per company. But the idea is that you're not trying to make a prophetic
judgment on any one company. You're basically trying to see whether it fits a
checklist, a small quantitative checklist that you have in place. And then, you
buy a lot of them and you let the statistical performance of those type of
companies work in your favor. So, you realize that on a bunch of them you're
going to lose. On a bunch of them you're going to win. And the overall results
are going to be good.
[00:30:43] Now,
if you're looking at getting into more of a qualitative assessment, then you
might have to spend eight to 16 hours reading through financials and press
releases, and seeing what management owns and what they don't own, and seeing
what the activists are saying. Looking at, say more of an industry. But also,
there's another factor that comes into play in that the more you do it, the
faster you get at it.
[00:31:14] So
if I'm managing a quantitative portfolio and I'm assessing a company, it might
take somebody who's new at it, say an hour, but I could probably do it in about
20 minutes because I know where to look. I know what information to ignore. I
know how to crunch the numbers very easily, very quickly. And same even on the
qualitative aspect. I know that Charlie Munger recently, well, I wouldn't say
recently, maybe 10 years ago, he bought a company called a…
Ney
Torres: [00:31:47] [Unclear]
So, that’s recently.
Evan Bleker: [00:31:50] It was definitely recently for Charlie. Yeah.
Yeah. I mean he bought a company called Tenneco. It was a cigar, but it wasn't
a net-net, but it was a cigar-butt. And they asked him, “Well, how long did you
spend on it?” And he said, an hour. And Charlie's not somebody who goes for the
quantitative situations. He's highly qualitative, but you know, after, I don't
know, 70 years of looking at stocks, it's taking them an hour or two to assess
this company. So, there is that factor too,
[00:32:25] You
commented on simple but not easy previously. I would say that the most
difficult part of being a net-net investor is temperament. I see a lot of investors
get interested with net-nets, and then for whatever reason they move on. It's
not because the strategy is not exceptional. It has to do with their own
temperaments. Maybe they're not patient. They're looking at a single year's
returns. Maybe they see something else that's flashy that couches their eyes, a
strategy, and then they move on. So, yeah. So, I think the actual mechanics of
going through and doing the quantitative analysis is pretty easy. If you have
any competence with financial statements at all. It gets more difficult from
there, but it really is the temperament aspect of it.
Ney Torres: [00:33:20] So why do you think you can see these
opportunities when there's… you mentioned it's quantitative so it's based on
numbers. Why a computer will just skip them all away.
Evan Bleker: [00:33:35] That's a good question. I don't
necessarily know the answer to that, why a computer won't come along and arbitrage
the situation away. It seems rational that it would, but then again, the
computer algorithms are developed by humans and there's a lot of human bias
that go into the algorithms.
[00:34:00] So,
to some extent, if the algorithm or the system is not designing itself, like
you would see with a general AI. It's designed by humans and it's going to do
what the humans wanted to do. And so, if everybody thinks that net-nets are
pretty much extinct, then I think that the people designing the algorithms are
not going to be looking for net-nets.
[00:34:29] I
have a hunch that there are algorithms that go around and do try and buy net-nets
because when I'm trading these stocks, and as a value investor that's a dirty
word we don't like to say, trading, but you have to trade in and out of stocks
even if you're buying value investments.
[00:34:48] What
I tend to see is I tend to see tiny stocks that have just a lot of 100 share
trades throughout the day. And there's nobody's sitting there routinely putting
in a hundred shares at 30 cents, for example. That's some algorithm that's
doing that. So, there is some algo involvement in the net-nets space.
[00:35:15] But
another factor is, typically you can only invest so much money into the net-net
strategy. It doesn't work with large sums. These companies are absolutely tiny.
We're talking a microcap and nano cap companies, which are companies that have a
market valuation of less than 300 million. A nano cap would be last. I can't
remember the actual definition. Maybe it's, I don’t know, 100 million or
something like that, but large funds can't buy them. But the large funds are
exactly the people who would be using algorithms and they would know about this
strategy. So, this strategy is really only for small investors. It's really
tough for large investors to use the strategy. So, if you can't put that much
money into the strategy, it's not really worth pursuing for them.
Ney Torres: [00:36:17] So I have some points here I want to ask
you very briefly. You are known to have 10 positions in net-nets, right? Back
in the day, Buffett used to have like 3% positions. That means 33 stocks, 40
stocks. Why did you change your perspective into 10?
Evan Bleker: [00:36:41] That's a really good question. I think
I've made the mistake when I started out of starting with two or three
positions and I just wanted to see how the strategy works. St the time, I didn't
really know anything about net-net investing. So I figured, okay, well, you
know, net-nets are supposed to work out beautifully even though I didn't read
much about net-nets at the time. I'm going to buy two or three just to see how
they work out, but I didn't realize that it was a statistical strategy. I
wasn't basing my picks a lot on qualitative measures. It was all quantitative.
[00:37:18] And
by dumb luck, they ended up working out because they could have gone any way
because there was a lot of variance in return within a portfolio. But, by dumb
luck they worked out. And then I read more and more that you need more picks.
I’m like, “Oh, okay.” Well, I started getting a clue about what I was doing and
it started diversifying out from there.
[00:37:40] And
it got to the point where I had 15 companies in my portfolio, but I felt that
was too many because the quality of the companies that I was putting in my
portfolio were not as high as others. So, the 10 that I had in there were, say,
high conviction picks, but the other five were not nearly as high conviction.
[00:38:06] So I
figured that. I might as well concentrate on my highest conviction picks since
I'm now adopting qualitative analysis. What Buffett did in his sixties, I think
he described it as, you know, some of these are going to work out. Some of the
smaller positions, 3-5% positions are going to work out. He doesn't know which
ones were so he's kind of taking a quantitative approach to the smaller
positions, I believe. But he was always betting heavily on his highest
conviction picks. I figured that I might as well just bet heavily on my highest
conviction picks anyways. Time is a factor.
[00:38:55] If
I'm spending a lot of time researching companies or trying to dig up
exceptional firms on a qualitative basis that I don't really have a lot of time
to manage the websites and to spend time with my girlfriend, and all that. So,
I ended up concentrating more on 10 positions that I had a higher conviction in
Ney
Torres: [00:39:22] How
many years have you actually done 10 positions within that?
Evan Bleker: [00:39:27] I would say 10 positions since maybe 2013.
Before then I was slowly ramping up. So, I started net-net investing in about
2010. And then, 2010 they worked out. I ended up buying more stocks in 2011,
2012.
Ney Torres: [00:39:49] Perfect. Another question is, is there
something cheaper than that current asset value? I think that will be net-net working
capital. Let me explain that for the listeners right now. Net current asset
value, it's when you take everything that's probably cash in the next year and
pay all the debts, right.
Evan
Bleker: [00:40:15] Yep.
Ney Torres: [00:40:16] Yeah. The net-net working capital is
just you ignore all the billings. You pay the desk just with the cash and
ignore the cars of the business, the buildings. That comes for free. And
there's actually some companies that fall into that bucket sometimes, right.
Evan Bleker: [00:40:34] Yeah. Actually, I would say that net-net working
capital, the way Graham described it, did take into account fixed assets but he
discounted them heavily. He applied a 98% discount to the fixed assets.
[00:40:49] Net-net
working capital is basically the same as net current asset value. Net current
asset value is what we've been discussing for the last, however long time. Yeah,
quite a long time.
[00:41:06] Net-net
working capital is a tactic or a strategy that applies additional discounts to
the various current asset items. So, cash is always 100%, but you might have
receivables and they might receive a 25% discount. Inventory might receive a
50% discount. And then, eventually you'll take into account fixed assets or long-term
assets, and you'll apply a 90% discount to them. These are all rough discounts,
but you end up with, I think a more robust valuation. But you whether it's more
profitable, that's another question.
[00:41:49] And
I don't think there's any evidence to say that it is or isn't, but definitely
the valuation's more robust. But while we're talking about key strategies to
pick stocks, I don't think anything gets cheaper than net cash.
[00:42:09] So,
you know, all companies have bank accounts. We'll say Company A has 10 million
in his bank accounts, and then you look at the liabilities and the liabilities
are 3 million. Well, 10 minus three is seven. And then you look on your Yahoo
finance and see where the company is trading at, and you see that it's trading
at five.
[00:42:30] Now
what this means is that for every $5 you spend on buying stock, you get
ownership of $7 worth of cash. But that cash is held in trust by management. Nothing
is cheaper than that. I recently bought more of a position that I had. It was
trading below net cash and management was actually going to distribute a dollar
worth of cash. I think I bought for $1.96 and it had $2.25 in net cash. So
yeah, they work out really well.
Ney Torres: [00:43:15] Nice. And that's how you compound.
That's how you make a lot of money. So, tell us how have you done in this since
2013. That will be seven years with your portfolio? What has been your
experience? The good and the bad.
Evan Bleker: [00:43:32] Yeah. Since 2014, I switched brokers to
interactive brokers. This isn't a plug for them. They're really a great broker
for going broad and deep within the market. So, you can cover a lot of markets,
you can cover a lot of market caps.
[00:43:53] And
they also had a really good tracking tool. Since 2014, my portfolio is compounding
at about 22% a year, which I consider good but below where I want to be long-term.
Before that, I had better return from 2010 to 2014 just because, I guess
there's more net-net at the time. We were earlier in the bull market. And so, a
lot of stuff was depressed that was eventually going to go up. It was just a
better market for investing in net-nets.
[00:44:31] Now,
from 2014 to now, I had some really good years between 2014 to 2017. And then,
2018 and 2019 I actually lost money. So, you don't always make money. Sometimes
your portfolio goes down. 2018 was not a good year for net-nets. They didn't
work out that well. And 2019 was not a good year for me. I made a couple of
mistakes in selection. I picked a couple stocks that did a workout and that
knocked my portfolio down. But overall the results have been quite good.
Ney Torres: [00:45:14] Yeah, 22 compounded is you double your
money in three and a half years. So, that’s amazing, right?
Evan
Bleker: [00:45:24] Yeah
Ney Torres: [00:45:24] Because if you have 100,000, 10,000, a
million, that turns into two, then it turns into four, and then it turns into
eight, and 16. You know? You're doing great. Tell me a little bit about where
people can find you. Where can they learn this?
Evan Bleker: [00:45:41] The main website is NetNetHunter.com. And
so, N-E-T-N-E-T hunter dot com. That is the best place to look for information
on net-net stocks in my view, my humble opinion. If you want to… Sorry, go
ahead.
Ney Torres: [00:46:04] I add to that. I shall actually say
that. Yeah, for sure. If you think about buying this very, very, very cheap
stocks, that's the best way to go. And you have a beautiful checklist. You've
mentioned a checklist. If you go to Evan's webpage, you're going to find a
checklist of what you should look for or not look for. And you also offer a
subscription, right.
Evan Bleker: [00:46:29] Yeah, so we have a subscription. Net Net
Hunter is really a tool that I use for my own investing. When I started out in
net-net investing, I would have a list of American net-nets and I'd filter
through them based on a checklist. I've just developed that further. So NetNet
Hunter has now an international list of net-net stocks. I think we have 500 at
last count. Five or seven hundred. Somewhere around there. And then, I have an
analyst that filters that by hand based on a checklist criterion to create a
short list. And then, I pick virtually all my stocks from the shortlist. Any
net-net that I'm buying is typically from the shortlist. And so, the
subscription is really to get access to that and to get access to a community
forum and additional learning resources. Oh, also analysis.
Ney
Torres: [00:47:24] How
much does it cost per month to be part of the subscription?
Evan Bleker: [00:47:28] It's about $41.60 but we do a per year
basis. So, per year it's $500. That's US$500. It recurs. You can stay a member
as long as you want or as short as you want. Up to you.
Ney Torres: [00:47:47] Yeah. So, $41 per month to have an
analyst and agree to strategy that has been proven to be successful for the
last like hundred years. He developed this strategy in 36. I think 1936 Graham,
right. So almost a hundred years. It doesn't get better than that guys. So, please
make yourself a favor. Even if you're not planning to invest into stocks, you
should create a fake portfolio in interactive brokers, which is the best broker
by far, I think. They'll give you a fake million dollars and just do this for a
year. It's probably going to take you a couple of minutes per month. And you
can start testing this. Again Evan, thank you so much for your time. It's a
pleasure to finally meet you after all these years of mail.
Evan
Bleker: [00:48:38] Yeah. We
talked a lot.
Ney
Torres: [00:48:40] Yeah.
Anything else you want to add before we close the show?
Evan Bleker: [00:48:45] No, I think we pretty much covered
everything. I would say though, that if you decide that you want to go with net-nets,
you really have to be in it for the long-term, because just like within your
portfolio, you can have companies that outperform or underperform.
[00:49:01] It
works the same way from year to year as well. One year it could be a way up.
The other year it could be down. It's really the average over a period of time,
say 10 years, that builds your investment record.
Ney Torres: [00:49:18] That is true. Okay. Thank you so much
for your time and see you next time.
Evan
Bleker: [00:49:23]
Awesome. See you.
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