Although countless investing styles have been used to pull profits out of the markets, I would argue that most investors will fall into either of the following two categories:
- Balance sheet investing: the investor values the quality of the assets that the company owns and seeks to invest in the company when its net assets are relatively cheap.
-Cash flows/ Earnings estimations: the investor seeks to find and invest in those companies that will yield strong profits in the future, and seeks to do so at an affordable price that will allow for his investment to appreciate when profits subsequently rise.
Both of these approaches are perfectly valid for investing in public companies. It is to the preference of the investor to pick a style that best suits his skill set. I would argue that the first is more of a cerebral approach whereas the second may benefit from creative thinking, as well as from comparative and forward thinking.
Net-net Investing: A simple balance sheet investing approach
Even those outside investing circles are aware of Warren Buffett, the famous investor who made billions by investing into such famous companies as Coca-Cola, Apple, or Gillette. Buffett's ability to pick companies that have become household names all over the world has made him the world's most famous investor, and a very wealthy man. Yet not as many people are aware that Buffett started out in investing using the "balance sheet investing" approach. To be more precise, Buffett specialized in what in value investing circles are known as "net-net" stocks.
Basically, a net-net is a company that is selling in the market for a price that is lower than the company's liquidation value. To get even more technical, if the company were to hypothetically close down its operations, sell its buildings, its inventories, its equipment, and pay off its suppliers and other creditors, the investor would be able to make a profit because he invested at a lower price than this "liquidation value".
Quite simply, then, if an investor were able to pick many stocks that were selling for lower than this liquidation value, his money would virtually be protected from investing losses. Further, in the many cases for which the business does not liquidate, the investor may benefit from the profits that the company is able to produce.
The beauty of net-nets is in its simplicity: if you buy something for less than what it's worth you will make money!
In subsequent posts I will delve into the additional benefits, the complications, and the potential returns that may be realized from investing in net-nets.
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