In a recent article, I explained how crises could provide opportunities for the patient value investor. Three such sharp sell-offs have occurred in my investing lifetime: 2008, 2020 and 2022. (Arguably, the 2016 Brexit result sell-off could be included here, but it was so brief it barely appears on a long-term chart.) In each case, the blow-up of widespread leveraged trading strategies added to the woes caused by the initial bad news and, with hindsight, took some equities significantly below a conservative assessment of their intrinsic value.
The problems with investing in times of crisis
The problem with investing during such crises is that they often appear during periods of extreme uncertainty. Take, for example, the 2020 sell-off in response to COVID-19. The background to the sell-off presented some significant challenges to investment decision-making:
The future earnings expectations became highly uncertain for the majority of stocks. In many cases, brokers removed all forecasts from the market, meaning that investors had no idea what earnings and cash flow would be for many companies.
Dividends were cancelled across the board, including in formerly recession-proof companies, such as cinema operators, for whom COVID-19 was an entirely unanticipated risk to consumer behaviour.
Companies that were likely to benefit from the crisis, such as biotech or pharma businesses, were already on unattractive valuations and became more expensive.
Even relatively stable investment metrics that many value investors use, such as tangible book value, became uncertain since the future value of long-term assets, such as property, plant, and equipment, came under question.
Faced with such an investing backdrop, it was very tricky for an investor to make an informed decision as to where to deploy their capital. However, amid this uncertainty, a type of investment opportunity became available that has been uncommon in recent years: some stocks became net nets.
Net nets
A net net is a type of deep value investing first made famous by Benjamin Graham, known as the father of value investing. His idea was to buy a stock so cheaply that it traded at a discount to the liquid assets it held on its balance sheet, such as cash, inventories or receivables, even after you netted off all the current and non-current liabilities. In making this assessment, no value is given to non-current assets, such as property or equipment. Graham…
