When I was 21 or 22, I fell into a deep value investing rabbit hole. Like anybody who’s ever read a Benjamin Graham book, the experience left me thirsty for his mythical net-net investments. For the uninitiated, those are stocks that trade at a discount to their readily recognisable asset value. This is the classic case of buying a dollar’s worth of assets for 50 cents and selling it back for a dollar (or slightly less) when the market spots the value.

Warren Buffett often calls this ‘cigar butt investing’, likening it to picking up the end of a discarded cigar and getting one last puff from it. Situations like this were rather common in Graham’s day because he was picking through the wreckage of America’s Great Depression. They are far rarer now. The number of analysts and quality of investing information has increased exponentially. Stocks rarely trade that cheaply.

Investors like the late Marty Whitman tweaked Graham’s approach for the modern age. As well as current assets like cash, inventories and accounts receivable, Whitman included high quality real estate assets he thought could easily be sold within a year. Unlike Graham, he didn’t use this technique to buy cheap shares and flip them. He liked to hold positions for a long time and used this method to ensure he was buying at prices that offered a margin of safety.

In 2018 I found a situation that blended these two approaches. The company was (and still is) a terrible business. But I estimated that the shares were valued at least 50% below their net asset value, once the true value of its large warehouse near London was taken into account. The company had net cash (more cash than debt), owned the logistics property freehold and even had permission to build houses on the surrounding land. My plan was to buy the shares until this value was realised and then sell them.

A risk in these situations – which Graham reduced by holding 20 or 30 of them at once – is that the underlying value can take a while to surface or doesn’t surface at all. This is often called a value trap. While it’s easy to say that the company should get taken over or the asset in question should be sold, it won’t just happen because you want it to. For this reason, investors in these situations generally prefer to see a reason for that value to crystalise quickly – something usually referred to as a catalyst. Another risk is getting so besotted with the discount to asset value that you ignore other key factors influencing the likely outcome. I wrote about this in ‘I ignored Buffett's advice and it cost me’.

Young and confident stupidity

In my case, I thought there was a good chance the warehouse would be sold fairly soon. The stock had performed poorly for years, shareholders were asking questions about the warehouse and the company’s CEO and biggest shareholder was nearing retirement age. I thought he might want to cash in. Being the young and confident male my colleague Mark refers to in this article on portfolio concentration, I put 100% of my (tiny) brokerage account into the stock.

Within a year, the company moved to a smaller warehouse and netted the difference. The stock almost doubled, the asset value had been realised and all that remained was the rubbish business. Only I didn’t sell at that point. Why? Because I didn’t have any shares left to sell. Five or six months into holding, I withdrew everything from my brokerage account to fund a trip around Southeast Asia.

I don’t bring this tale up as a bad luck story. It’s actually a good luck story because I should never have been putting 100% of my portfolio in one micro-cap. Strategies like Graham’s net-nets and modern equivalents rely on the strategies working in across many holdings. They will not have a 100% hit rate and neither will any other strategy.

I brought this up to show that money invested into equities should be untouchable for long enough to see out your strategy. Picking the bottom in any investment is only possible through blind luck. Taking anything less than a four- or five-year time horizon – and being able to stick to it – is extremely risky. I was very lucky not to lose money on this position, even though I did a good job of finding an undervalued share by Benjamin Graham and Marty Whitman’s standards.

A loss you can't recover

Failing to hold positions for long enough to see a return has another drawback – it robs you of compounding time that you can never get back. Imagine you are 30 and have been contributing to a self-managed retirement portfolio for five years. While the MSCI World Index chugged along at 11% a year during that time, you constantly moved in and out of your investments before they move much either way. At the end of the five years, you estimate that buying the index and leaving it would have left you with $4000 more than you have today. That might not sound like much. But if that $4000 goes on to compound at 7% per year, the 30 year old will be roughly $43,000 worse off by the time they are 65.

I mention those sums because I did a similar calculation at the start of 2024. For a long time, I’d find a new stock idea every few months that I just ‘needed’ to buy. To make it a decent position size, I’d usually need to sell or trim something else – something that not long ago was also the latest hot idea. Some of these sales turned out to be lucky escapes. But many of them have gone up a lot in value. By constantly trading and essentially getting a flat return, I robbed myself not only of returns but of time.

Behavioral flaws like these are part of the reason why our Mind The Gap study persistently shows a lag between index returns and the returns investors actually achieve.

Recognising these flaws in yourself is humbling. But it’s important because it’s the first step in making amends. My case, a severe bout of overtradingitis, has a couple of potential remedies. One is to just admit that I'm better suited to buying an index or managed fund. I have taken this approach to my Super, which is 100% invested in a lifecycle product using index funds. This won’t just free up time to focus on my career, it should also eliminate my worst investing bias from my most important investments.

Another way is to set yourself some rules. In my British portfolio, I now have a rule that I can’t sell anything for at least 3 years after I buy it. This could lead to some bigger losses at the position level, but it also makes sure my good investments will have time to work. When I did that audit at the end of 2024, two positions dominated the total returns I’d achieved. And guess what? They were the two positions I’d held for longest.

Why I no longer hunt for “net-nets”

Even though I didn’t stay invested long enough, you could say that my early experiment with net-nets was encouraging. I no longer use this as my main approach, though. There aren’t that many situations that meet this standard and the ones that do exist take lots of research. I also don’t think that holding companies of such a (usually) low quality is a good mix with my prior record of overtrading. Instead, I am trying to find companies of a quality that I would be happy holding indefinitely.

I am still heavily influenced by my time in the deep value rabbit hole. For instance, I still get a lot of comfort from my investments being backed up by high quality assets rather than just earnings. Only I’m now willing to include intangible assets and moat sources in that assessment. I am also still trying to buy shares that are deeply out of favour or where the short-term outlook looks a lot worse than the long-term view. I hope this will give me cheap entry points for good companies and reasonable entry points for really good companies.

By looking further out, I hope to get an edge over professional investors focused on what the next quarter or two will bring. But first, I need to show that I can hold on to positions long enough myself. I’d love to hear about how your investment approach has changed over time and what mistakes you’ve made along the way. Send me an email at [email protected].