I can’t remember exactly how I found his blog but I think I stumbled over it when he wrote about finding attractively priced companies in Italy.
I wanted to interview Nate to find out more about his investment approach and because he can help you if you are a US investor that would like to invest in Europe as he has found a way of investing worldwide from the USA at reasonable brokerage rates.
If you are not US based I you will also find the interview and his blog interesting as his investment ideas are so far removed from what you see or read in the mainstream media.
Make sure you read to the end of the interview as Nate has got an interesting investment idea for you.
Before I give away too much here is the interview. (emphasis mine)
How did you get started in investing?
I was given some stock from my grandfather and after receiving statements for a few years I figured I needed to know what I owned. I started to read the site MarketWatch.com and would Google terms I didn’t understand such as P/E or market cap.
One day I came across an article with the site’s top recommended investment books, one of them was The Intelligent Investor by Benjamin Graham
Once I read the Intelligent Investor I was hooked, I understood the difference between investing and speculation, and I wanted to be wise in how I managed my own money. So I put Graham’s ideas into practice in my own portfolio.
I continued to read and learn and have been investing now for the last seven years or so.
Can you talk about your investment approach and how it has developed over time?
I’ve read a number of books on investment, and the one that stuck with me the most was Benjamin Graham’s Security Analysis. I’m actually on my third pass through it I’ve enjoyed it that much.
I’m not a franchise or moat investor, I don’t look for good quality companies selling at reasonable or cheap prices (although I have occasionally found some).
I am looking for tangible discounts to asset value.
This doesn’t mean I won’t look at a good company selling cheaply (I will!), but I mostly focus on asset discounts. I will estimate a reasonable value for a company’s assets and earnings stream and look to buy at a large discount. When I look at a stock I want there to be at least 50% upside, this way if my estimates are off and the upside is only 15% I still have a gain.
I didn’t always start like this, I initially started looking at spinoffs.
At some point I read an article mentioning how companies were selling below liquidation value, and some below cash value. I couldn’t believe this was even possible, so I started looking into it and that’s how I stumbled on net-net’s and other asset bargains.
When I saw my first net-net I actually didn’t believe the balance sheet, I thought I was missing something.
I calculated up NCAV two or three times, then went searching for some reason for the balance sheet to be wrong. I couldn’t find one and put some money into it, a few months later the company traded up to NCAV and I sold. I was hooked!
I find net-net’s to be the easiest investment to research, look at, and buy.
The problem is outside of Japan there aren’t many of these that are worth an investment.
The second problem is I need to flip my portfolio often as some of these companies are always selling up to NCAV, and there’s a risk when I sell into a higher market there won’t be new net-net reinvestment opportunities.
To solve this problem I’m always on the looking for a decent company at a really incredible price. It’s very rare that a large blue chip sells at a basement bargain price, so I usually find myself looking at small caps and microcaps.
Most of my investments fall into three buckets:
- Net-net’s and low P/B asset stocks,
- good companies I’ve purchased a cheap prices and continue to hold, and
- special situations.
I don’t have many special situations right now, just a few spinoffs and a liquidation. My hope is that spinoff companies I purchase can turn into the higher quality companies over time.
How did you weather 2008 and the first part of 2009?
I did fairly well although not that great in absolute terms. I beat the market in both 2008 and early 2009, but all this meant was that I lost less than the market, so I still had losses.
The one lesson I learned from 2008 and 2009 is to keep ready cash on hand.
I went into the crisis almost fully invested, a lot of bargains appeared, but I didn’t have cash. I didn’t want to sell what I owned because it had become irrationally cheap.
I now hold a minimum of 10% in cash at all times.
How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?
I wish I had a standard way of finding ideas because but I don’t. I have done a lot of brute force searching.
For example back in 2010 I took the US net-net’s list and went through them one by one from the top looking for anything good.
I’m doing something similar now with 100 Japanese net-net’s.
I’ve also brute forced Portugal, about 500 pink sheet stocks and numerous lists generated from broad screens. I’m halfway through brute forcing the New Zealand market.
My method is less than ideal, but it ensures I don’t miss anything.
To deal with the large volume I’ve devised a reverse search method. When I first look at a company I am looking to exclude it as quick as possible. So if I come across a company with a lot of debt and losses I will just move on without looking further.
This might be a great investment for someone, but not me. By excluding quickly I can cover a lot of ground, and it ensures I don’t get bogged down reading the annual reports of hundreds of companies.
A company I haven’t been able to exclude quickly I’ll take a deeper look eventually culminating with a read of the annual report and recent filings. I should mention if I can’t exclude a company early on I’ll usually read the notes to their filings and look for something to exclude them on there. Notes are important, a lot of things are buried in there like liabilities I’d like to avoid.
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How many positions do you typically have in your portfolio?
I don’t have a fixed target of positions I like to hold. I currently have 38 positions not counting some mutual funds I hold in a retirement account.
I would be happy to own 50 or 60 stocks if they met my criteria, I would also be happy to hold 10 stocks and a lot of cash if I couldn’t find any good opportunities.
My portfolio is composed of small and very small companies, usually companies that do just one thing.
A large cap might have five or ten divisions, and each of those divisions are probably larger than some of the companies I buy.
So buying a single large cap is buying diversification in a sense. If you took my analogy one step further and assumed each large cap had five divisions my 36 small caps is the equivalent of owning seven large cap stocks.
Describe some of your most notable investment mistakes and what did you learn from them?
I recently did a long post looking at this very thing called Where’s the risk?
The post gives a lot of background and details some of my biggest mistakes, I’d encourage everyone to at least skim that post. In short my biggest mistakes all came from the failure to either see a liability, or appreciate how big a liability really was.
One rule that I created for myself after looking at my failures is that I require all of my investments to be cash flow positive.
What are your ideas concerning portfolio composition and the value of individual holdings in relation to the portfolio?
Due to the fact that I like to buy both small companies I tend to diversify a bit more than most. I won’t initiate a position that’s bigger than 5%, although if a position grows to larger than 5% I don’t cut it back to fit into an arbitrary limit.
I will usually open a position at between 1% and 2% for a net-net or what I would consider a two pillar stock. If I find a good company at a cheap price I will go higher than 2%, but not initially. I’ll buy 2% and then as the price falls (which it always does after I buy) I’ll accumulate more.
Given how I invest my portfolio is a bit strange.
I have a lot of 1/2/3% positions of net-net’s then some larger positions of good companies that have grown.
For example I own Mastercard and America Movil, both are fairly large, but have both grown into place after starting small.
Do you follow any key risk-management guidelines in managing your portfolio?
Not in a traditional sense.
One of my key criteria is that a company must have positive cash flow. I have been burned in the past with net-net’s that had losses and eventually my portfolio had permanent losses.
I also want to buy companies with a significant margin of safety. To me a margin of safety isn’t buying at a discount to what I think a company could earn, it’s buying assets at a discount with almost no regard to earnings.
What is the current geographic mix of your portfolio?
I hadn’t looked at this in about two years so I sat down and calculated it for this interview.
Of my total investments 50.27% are US based and 49.73% are international, so almost a perfectly even split. I didn’t plan it to be this way, I invest where the opportunities present themselves.
I would predict over the next six months to a year the split will probably drift to 40% US 60% international or more.
How did you get involved in writing an investment blog?
Before I started blogging I was putting research and notes in Word documents, it was clumsy and disorganized. I needed a way to organize my thoughts so I started the blog, I put everything out there and never expected anyone to read it.
Somehow people found me and what I was writing and I found myself a blogger verses a person keeping notes inside of a blog.
I’ve changed my focus some now that I have a number of readers, I try to write either something that’s entertaining and educational or I will write about investment ideas that I’d consider investigating further.
I used to write about companies I looked into and passed over, but I do that a lot less now. I never want to write something that when the reader gets to the end they think “that was a waste of time.”
I recognize my readers have a lot of other ways to spend their time, so I appreciate the fact they’re willing to spend a bit of it reading my thoughts.
You invest and write a lot about European companies why? How did the idea develop?
After I finished my brute force of US net-net’s I started to wonder if any of these companies existed outside of the US. I was able to run a screen and found a few hundred net-net’s worldwide.
What really ignited my passion for international investing was when I realized how saturated the US market is.
Most Americans only focus on US stocks, and I realized that most foreign investors consider the US market in addition to their own.
So most of the world’s investors are looking at US stocks, it seemed things can get very picked over. When I started to look abroad I realized how ignored some markets really are.
Any internet sources of information you can particularly recommend?
For non-US stocks I’ve adopted a combination approach. I’ve found MSN Money has the most up to date financials, and a 10 year history which is nice. Some pieces of information are missing so I fill the gaps with Bloomberg.com and sometimes FT.com.
FT.com is a great site with a really nice global screener, they have data on most listed equities worldwide.
What US broker/s do you use to invest worldwide?
I get questions about this all the time, it seems like investing outside the USA is not easy for US based investors.
I used Fidelity for all of my international investing, and almost all of my investing in general. We have a small mutual fund account at Vanguard as well.
With Fidelity’s international trading buying and selling stocks overseas is no harder than buying or selling in the US.
Fidelity can handle 17 markets online.
I’ve talked to their trading desk a number of times and Fidelity has access to first world markets through brokers. Online commissions are steeper than the US ranging from £8 to ¥3000, most of Europe is €19. If you trade over the phone it costs $80.
So for an example I wanted to buy a Swiss stock in my IRA (retirement account).
International trading is only available in taxable accounts, but I called Fidelity anyway. They told me for the full commission ($80) they’d be able to buy or sell anything I wanted in my IRA as long as they have access to the market. In my case I was able to buy the stock without a problem.
If you’re buying or selling with Fidelity online there is no minimum trade size outside of what the exchange allows. This means you can buy £100 of a British stock if you want.
If you want to execute a trade on an exchange with a broker that Fidelity doesn’t cover online there is usually a minimum trade size of $50k. The reason for this is Fidelity calls a local broker to execute the trade, the local broker takes a cut, and Fidelity takes a cut, the only way to make this worthwhile for both parties is if there’s a larger minimum.
I have been able to negotiate this down to $5,000 on some Western European stocks not available online.
I’ve found the biggest hurdle for US investors isn’t the tools it’s the mindset.
Most Americans have been lulled into thinking the US markets are the strongest and safest with the best accounting in the world.
I don’t think any one part of the world is exempt from fraud, even the US, investors need to take precautions no matter where they put their money. But the reality is most first world exchanges are as safe or safer than the US market.
I’ve found European companies in general are a bit more conservative than US companies with regards to accounting as well.
What has been your most read blog posts?
My top five posts have been:
1) A post on Seahawk Drilling – Seahawk Drilling, value in bankruptcy?
2) A post on Japanese net-net’s – How about those Japanese net-net’s?
3) A post about CIBL Inc. – CIBL: spinoff, yes; catalyst, yes; possible five bagger, yes
4) Mills Music Trust (I can’t believe this is on the top 5 list) – A true oddball: Mills Music Trust
5) A post on the performance of Japanese net-net’s – International net-net’s one year later (performance update)
Nate, thanks for your time and insights
Thank you Tim for giving me the opportunity to speak to your readers. If any readers have specific questions my email address is listed at my website.