newsletter 8 - turning simple net current asset value investing into sophisticated ncav 22nd october 2014
It is not enough simply to buy every company that has a NCAV under current price. We need to be more selective than that. (See blog on 15th October for definition of NCAV). To start with I whittle down the short-list of potential NCAV using a ‘throwing-out’ checklist:
Foreign and opaque
For a start, I’m hesitant about investing in companies run from abroad. I don’t have a clue about corporate governance procedures, disclosure requirements, political interference, etc., for companies run out of, say, Russia or China.
I’m even reluctant to plump for US companies because I like to be able to judge the sustainability of the business and the quality of the management. How can I do that when I’m thousands of miles away, ignorant of the market environment and unable to meet the managers. At least with French Connection (LSE:FCCN) I can see what they are doing on the high street, I have some grasp of retailing in the UK, etc.
I’ve also rejected companies for further consideration because they seem nothing more than cash shells with thin management and even thinner business legs.
Then there are the mining (and oil) companies. Mark Twain said that mine is a hole in the ground owned by a liar. I would not go so far as to say that they are run by liars, but just what are those holes worth? Such imprecision makes me nervous.
Managers/controllers looking after number one
On examining accounts and reading between the lines I suspect some managers are syphoning value from the company. I spotted one team who set up a separate company with 50% of its shares owned by them. This unquoted company was then given control over various assets of the quoted company.
Then there are those which seem to have a history of playing games with the accounts. You cannot make a good deal with a bad person.
One family-dominated company I examined issued options allowing the family to buy shares amounting to more than the market capitalisation. You need to dig deep to find these little facts.
I would rather invest in a traditional manufacturing or service business, with long-standing experienced executives, than one run by sharp City-types who dart in and out of companies playing financial manipulation games.
Avoid those that appear to be the playthings of the main shareholders who show little awareness of their responsibility to minority shareholders
Watch out for the hidden liabilities that wipe out NCAV, e.g. large pension deficit.
Having listed what I’m looking to avoid in this blog, the next will outline the key elements I’m looking for in terms of prospects for the business.