Extreme value investing: screening for net nets

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...