The Purest Form of Value Investing
Net Asset Value (NAV) investing is probably the purest form of value investing. You find a company owning net assets which are in some obvious way worth at least X, and you pay considerably less than X to buy them. The discount is the opportunity, the larger the better, and the asset backing provides assurance of a very low risk of eventual loss.
Net Current Asset Value (NCAV) investing is more extreme: you consider the value of current assets only, allowing no value for PPE and other long-term assets, and continue to subtract all liabilities, both current and non-current, to estimate the net worth of equity.
These investment strategies fulfill the basic principles of value investing: they rely primarily on quantitative and objective evidence, not on subjective views or esoteric forecasts, and they take a safety-first approach to avoid incurring losses. On the assumption that the net worth of the company’s equity will not decline precipitously (this can sometimes be a heroic assumption), and that your entry price is at a sufficiently steep discount to the NAV, there is reasonable assurance that you should be able to “get your money back” with this kind of investment. The idea is that the company should at least be able to distribute something which is not very far from its liquidation value to investors, after taking into account exceptional liquidation costs and the operating losses which it occurs prior to liquidating.
Bitter Experience
Since my personal portfolio got properly underway in late 2012/ early 2013, I have made no less than nine NAV investments. Many other investments have been made which have been partly justified by NAV considerations, and partly justified for other reasons, but nine have been primarily justified by the discount to NAV.
Looking back on three years of data, despite good overall portfolio performance, I must admit that my NAV investing has been a financial failure up to this point. In hindsight, I underestimated the NAV discounts which were justified by the particulars of the companies in which I invested. In aggregate, NAV investing has not returned any profits for me whatsoever.
One thing I will say about NAV investing, though, is that it was a baptism by fire in terms of learning about all of the various ways in which a company can be poor quality. These include:…
