How to buy sh*t for cheap — Part II

In Part One, I outlined what are NCAV stocks and the basis of what you should be looking for. In summary, you are looking to find stocks where the price is less than 2/3rd’s the Net Current Asset Value.

You might be thinking — is that it? Sadly, it is not. Over time, gifted investors have expanded upon this screening criteria in an attempt to remove some of the inevitable duds that won’t rebound. Whilst you never get rid of all the duds, you can take steps to reduce this risk.

This is done by having a checklist of criteria that your NCAV stocks need to satisfy. If you do a google search you’ll find many variations of these checklists, often with many key characteristics being echoed.

I have found that Evan at Net Net Hunter has developed a very comprehensive checklist, which is also expanded upon in his book. I suggest you look at both and his website in general.

You could also look at the following articles of books:

  1. Jae Jun at Old School Values article;
  2. Deep Value Investing by Jeroen Bos — a great book that takes you through this style of investing and then looks at past investments which have been successes and failures, and current investments at the time of publication;
  3. The Investment Checklist by Michael Shearn;
  4. There’s Always Something to Do — The Peter Cundill Investment Approach by Christopher Risso-Gill;
  5. The Manual of Idea by John Mihaljevic.

The checklist that you use is designed to identify stocks that pop up on your NCAV radar that have fundamental underlying issues that are going to sink the ship or erode the assets. It is designed to identify warning signs that you should ignore at your peril.

A question I received after my last post was when is the right time to sell. This is a very important question to have an answer to. From my reading and research, there appear to be two schools of thought in this area.

The majority of NCAV investors tend to sell when the stock price reaches the underlying intrinsic value i.e. 100% of the NCAV figure. This is when the Margin of Safety is gone and it starts to become guess work beyond this point. To date, this has been my approach as it minimises the risk that the price could go down again.

However, some NCAV investors sell half of their holding when it reaches the calculated intrinsic value and hold onto the remainder. They then sell when they think the market has adequately valued the stock on different evaluation models, rather than the NCAV approach. Naturally, this is the riskier approach but could also lead to higher returns.

In either case, you need to regularly revisit your calculations of the NCAV as new financial date becomes available. The NCAV figure is dynamic and not static. It can and will rise and fall over time. You need to prepare to adjust accordingly depending on the movement of the NCAV intrinsic value.

If you are interested in this topic, I suggest that you look at the resources identified earlier in this post and also the following:-

Next stop will be an NCAV case study of a successful investment. Plus I’m actively looking for another good candidate that I can take through my checklist as an example.

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