4) Become Rich like Warren Buffett, the Best Investor in the World with Evan Bleker

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Cigar Butts Warren buffett

Today I’m joined by Evan Bleker, Founder of Broken Leg Investing and NetNetHunter.com. Evan has over 15 years of investment experience and he’s here to guide you through the world of value investing and one of the best kept secrets on Wall Street -…

Today I’m joined by Evan Bleker, Founder of Broken Leg Investing and NetNetHunter.com. Evan has over 15 years of investment experience and he’s here to guide you through the world of value investing and one of the best kept secrets on Wall Street – Net Net Stocks.

In this episode, Evan will tell you all about:

  • The mistakes people make when they try to imitate Warren Buffett
  • The challenges of value investing and key mentalities to overcome them
  • How to balance a quantitative and qualitative approach to identifying investments
  • How to start investing in “Net Net Stocks” – What are they? Where do you find them? How much of your portfolio should you invest?

Evan will cover all of this and much much more…

4) Become Rich like Warren Buffett, the best investor in the world with Evan Bleker

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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Financially Free Podcast with Ney Torres
Episode 2