Luis Sanchez: Hunting for Net-Nets

Episode Summary

Executive Summary: This episode is a deep dive into net-nets—tiny, underfollowed stocks trading below liquidation value—with investor Luis Sanchez explaining why they persist, how he finds them, and why they can produce asymmetric returns despite being boring, illiquid, and hard to sell to clients. He emphasizes balance-sheet focus, small-position concentration limits, and the value of occasional turnarounds.

Main Topics: Why net-nets still exist (Priority: 5/5): Luis explains that net-nets remain because they are tiny, boring, troubled, illiquid, and too small for major funds to bother with. Their obscurity and lack of analyst coverage create persistent inefficiencies. How Graham/Buffett’s game has changed (Priority: 5/5): He argues modern net-net investing is not the same as Graham’s era, when large-cap opportunities below liquidation value were common. Today’s opportunities are mostly in nano/microcaps, which are riskier and less scalable. Luis Sanchez’s path into net-nets (Priority: 4/5): A lawyer by training, he discovered net-nets after passing CFA Level 1, reading about Ben Graham, Buffett, Walter Schloss, and Evan Bleker, then began investing personally and through family capital around 2018. Idea generation and screening process (Priority: 5/5): He uses NetNet Hunter’s short list and raw list, reviews financial statements, and supplements that with Twitter and other investors. Screening focuses on liquidation discount, low leverage, and excluding certain jurisdictions/industries. Portfolio construction and position sizing (Priority: 4/5): Luis moved from 40-50 positions toward more selective sizing, believing 15-20 names can still diversify adequately. He caps a single net-net position at roughly 10% cost when conviction is high. Turnarounds, catalysts, and multi-baggers (Priority: 4/5): He notes upside is usually capped in net-nets, but occasional special situations or operational turnarounds can create huge returns. Support.com is his best example of a rare multi-bagger. Net-nets as discipline and downside protection (Priority: 5/5): The conversation closes on the idea that net-net investing keeps an investor grounded, forces focus on tangible downside protection, and can serve as a waiting period until a high-quality business at a fair price appears.

Key Arguments: Net-nets persist because they are too small, boring, and troubled for most institutional investors to pursue, creating a structural inefficiency. Graham’s historical net-net opportunity was broader and in larger companies; today the same strategy is mostly confined to microcaps and nano-caps. Underfollowed securities can give an individual investor a real informational edge because there is often no analyst coverage. A balanced process starts with a screen, but requires reading filings and looking for qualitative changes like management shifts or shareholder actions. Concentration should be used selectively: broad baskets reduce risk, but a few high-conviction positions can improve returns if the downside is well understood. Money-losing net-nets are not automatically bad; in practice, the best opportunities often involve distressed but improving businesses where the market is overly pessimistic. Net-nets may not scale well for funds, but that illiquidity is part of what makes them profitable for smaller investors. The discipline of buying below tangible asset value helps prevent overpaying for growth stories and keeps expectations anchored to downside protection.

Data Points: Highest retention in industry: By far the highest retention rates - Brandon describes MacroOps Collective before the interview begins Opportunity concentration: Two-thirds of the Dow Jones average companies - Luis compares Graham’s era to today to show how common net-net opportunities once were Target leverage threshold: Debt to equity less than 20% or 25% - Part of NetNet Hunter short-list screening criteria Market cap filter: Below $100 million - One of the screeners used for the short list Position count at start: 40 to 50 stocks - Luis initially built a broad net-net portfolio Current portfolio size preference: 15 to 20 stocks - His evolved view on diversification for net-nets Single-position max: 10% at cost - Luis’s cap for a high-conviction net-net position Managing size ceiling: $50 million - Luis’s estimate of the rough upper limit for a net-net strategy to remain practical Support.com entry price: $1.40 to $1.50 per share - Luis’s purchase price before the special dividend and pandemic-driven rerating Support.com special dividend: $1.00 per share - Paid after activist pressure on the board Support.com return: About 20x in four months - Luis cites the eventual speculative surge after the company was bought Net-net holding period example: 12 to 18 months - Referenced in the discussion of how long stocks may stay stagnant before a rerating ST Sharf ownership share: At least 34% of the world market share - Company claims in monorail systems for coal mines ST Sharf sale price: 11 euros per share - Largest shareholder sold its stake; Luis bought at about 6 euros ST Sharf purchase price: About 6 euros per share - Luis’s entry point in the German net-net

Pivotal Quotes: "The mindset there is just downside protection." — Luis Sanchez: Explaining the core philosophy of net-net investing "You cannot just make a presentation to new investors telling them because they will be like, why are you putting money in such crappy businesses, right?" — Luis Sanchez: Describing why net-net strategies are hard to market to outside investors "I buy net nets while I wait for the great business at a reasonable price to appear." — Luis Sanchez: Summarizing how he balances net-nets with higher-quality opportunities

Implications: Net-nets remain a viable niche for small, patient investors with analytical discipline. The strategy rewards balance-sheet literacy, patience, and selective conviction, but it is unlikely to scale for large pools of capital.