Guilt-Free Research: Why I’m Not Scared To Steal People’s Ideas Anymore

I’ve thought a lot about doing my own research in the sense of sourcing ideas.

When it comes to idea-generation, there are essentially two extremes:

  • “Old school Buffett”
  • Index investing

“Old school Buffett” is the investor equivalent of a music DJ “digging in the crates”– a tireless, thorough examining of every idea possible. Sifting, examining, turning over every rock. Buffett’s claim that he started with the A’s in the Moody’s Manuals.

Index investing is the opposite. Index investing is the admission, “I have no ideas.” It is resignation. It is buying everything, instead of buying something.

Most investors’ idea-generation process lies somewhere on the continuum between the two extremes.

I do believe that, especially because I am learning a lot right now, it is best for me to “do my own research” and to come up with as many ideas as I can on my own. To hang closer to the rock-turning end of the spectrum. I also believe that you should always be able to understand and vet an idea on your own that you receive from someone else (no “Investment From Authority”).

However, I have also come to realize that:

  • The greatest investors borrow liberally from others
  • Time is scarce

The second part is probably more important than the first; the first is about soothing a guilty-conscience, the second is about embracing a meaningful constraint of reality and not hanging oneself by a determination to be completely original.

In consideration of these facts, this the value I see in reading good investment blogs– they are chock full of ideas and they’re almost all being given away for free. A lot of the hedge fund guys profiled in “More Money Than God” (review coming) were notorious for getting ideas from others (mostly brokers) and learned to pay for the best ideas and thereby cultivate a network of hard-working, reliably intelligent investors who were creating actionable ideas for them all of the time. Following investor blogs is kind of similar except you don’t pay for the ideas you get. You look for people with styles you agree with, who demonstrate competent analytical skills, then you just follow them and pick off the ideas you like best.

You could also do the same with newsletters. For example, why should I spend hours and hours picking through net-nets on my own (aside from the exercise and practice) to come up with most likely the exact same ones that Geoff Gannon is giving away in his GuruFocus newsletter? Geoff Gannon is fucking smart (and I use the expletive to connote a certain level of emphasis, enthusiasm and awe, here) and if anyone is going to pick net-nets well, it’s probably him.

For $289/yr, I can have Geoff Gannon pick net-nets for me and spend that time digging up other ideas. I also get two other newsletters (the Buffett-Munger one sounds interesting and Gannon might write that, too, the Magic Formula one I am less interested in but still could have value) and a premium stock screener. That could end up paying for itself pretty easily over time. He picks 1 NCAV a month, so it’s essentially $25 an idea. It’s like paying a few extra commissions at Scottrade on each order.

I think I will continue to do a lot of “original” research early on and overall as my life as an investor goes on. But I think there are creative, low-cost ways to get smart people to do a lot of the heavy lifting for you which can free you up to spend precious time and brainpower on other problems/opportunities. I think smart investors learn to leverage themselves that way.

Until recently, it used to really bother me that I might take an idea I got from a good blog and put money into it. It didn’t seem “right” to make money that way. I was even tempted to purposefully NOT invest in the good ideas I found there, believing them to be “tainted” merely by the fact that they weren’t my ideas and I hadn’t come up with them.

But, I feel I’ve faced that guilt and banished it from my investor conscience, now. A fellow investor at CreditBubbleStocks.com reminds me that there is no credit for originality in investing; only in being right by having the best judgment.

Value Idea: Japanese Net-Nets

Japan seems awfully cheap these days:

A study made under the authors’ direction (covering some 3,700 stocks traded on the Japanese exchanges), found 512 stocks selling for less than net current asset value (includes long-term investments) and 212 selling below ⅔ of net current asset value (Graham’s famous “66% net-net” threshold). Equally interesting, 763 of the businesses were selling for less than cash plus short and long term marketable securities. Suffice it to say, there are large parts of the Japanese market selling for extremely cheap.

Based on the studies previously referenced, we would anticipate this basket of cheap Japanese stocks to similarly outperform the market indices. If the 30 businesses were afforded a modest multiple (8-times earnings before interest and taxes) + net cash, similar to what businesses typically sell for in private-party transactions, the average valuation for the 30 businesses would be $191 million vs. a market-cap-inferred-price of $86 million. You’re theoretically getting $191 million worth of private-party businesses for the public market price of $86 million. This represents a tremendous upside potential when the market’s sentiments toward Japan become normal again– offering a handsome potential reward for those brave enough to test their resolve in the face of threatening headlines.

Individual securities can be attained through most brokerage houses without too much fuss. Although the trading costs can be steep (we’ve paid $100 per trade through one of the bigger name houses), we feel the potential upside justifies the transaction costs, depending on the size of your portfolio. For smaller amounts of money and certainly increased liquidity, WisdomTree’s Japan SmallCap Div Fd ETF (NYSE:DFJ) may be a good way to participate in Mr. Market’s mispricing of Japan. Although the DFJ is not as cheap as a readily-attainable basket of individual stocks (Price-to-Book of ~.77 vs. much less), the liquidity and diversification is quite attractive.

I like the idea of investing in Japan. It’s strongly within the econo-legal orbit of Western countries and Western attitudes toward law and commerce. There is definitely fraud and corruption, as there is anywhere in the world, but it’s probably less worrisome in Japan than it is in a place like neighboring China.

The challenges to investing in Japan are:

  1. Cost of trading
  2. Language barriers in studying company publications
  3. Convenient access to reliable market data

I am not sure how affected Japan will be by a China slowdown. I am not sure how much a person should worry about the fact that many of these Net-Nets appear to be in the engineering and construction consultancy business– this was an area that was a focus of corruption and overspending during the boom years in Japan and it’s questionable how many of these businesses are kept alive now or in the future by political connections.

Finally, at some point Japan is going to have a day of reckoning related to their massive government debts. For the average Japanese business with earning power and some growth prospects the implied inflationary solution to that problem seems like a tailwind. But for a Net-Net with no real exciting business prospects and a lot of cash on the balance sheet, that seems like it could destroy a lot of value, if anything.

Austrian economist Gary North insists that won’t happen, but I’m not sure what will take place instead.

The best strategy, were someone to attempt to take advantage of this scenario and these low prices relative to net current assets, would probably be to build some kind of a basket of the best of the best, as the author suggests.

I read a good article by Geoff Gannon on How to Pick Net-Nets, and he argues the main idea is to protect yourself from the downside, not to worry about the upside, when it comes to Net-Nets. He says the main risks to look out for are:

  1. Fraud
  2. Solvency
  3. Ownership dilution

I’m going to keep my eye on the Japanese NCAV situation, but for now it might be cheapest and easiest for me to find a few issues in the US, first. Meanwhile, I wonder what’s going on in Europe as far as Net-Nets go?