Sunday, October 11, 2015

You Can Buy Stocks at a 20% Discount from the Current Price

Do you realize that it is possible to buy Berkshire Hathaway (BRK-A), Wells Fargo (WFC), Wal-Mart (WMT), Cisco (CSCO), and Chevron (CVX) at a 20% discount to their current trading prices? Here is how. 

You can invest in closed end funds, also known as CEFs, that are trading at a discount from Net Asset Value, also known as NAV. The NAV is similar to the book value of stocks. In other words the NAV is calculated by adding up all the stocks in the portfolio, and dividing that amount by the number of outstanding shares.

A closed end fund is similar to a regular mutual fund except that they trade throughout the day while the market is open and the trading price of the CEFs can fluctuate way above or way below the NAV. In addition, the number of shares is fixed. There are over 20 closed end funds that are trading at a discount of over 20% of their net asset value, according to the free list at Many investors invest in these discounted CEFs in the hopes that the gap between NAV and price per share will eventually narrow.

One example is Boulder Growth and Income Fund (BIF) managed by Boulder Investment Advisors. The fund is trading at a 21.8% discount to net asset value and based on their latest stockholdings, owns all the stocks listed in the first paragraph above along with Caterpillar (CAT), Johnson and Johnson (JNJ), Orace (ORCL), and many there stocks that are considered Blue Chip. The expense ratio is 1.72%.

Another deeply discounted CEF is Central Securities (CET), which is trading at a 19% discount to NAV. The fund's stockholdings include Intel (INTC), Citigroup (C), and Rainier (RYN). Investors should be aware that over 21% of the portfolio's assets are invested in The Plymouth Rock Company, which is not publicly traded. The fund's expense ratio is 0.67% and pays an income yield of about 2%.

However, there are several risks. First, the gap may exist for a long time, and can even widen. Second, the gap could theoretically narrow but the stocks in the portfolio could drop, so the fund would drop in price also. Third, and probably most important, is that many CEFs hold illiquid, private, or non-trading stocks, and the NAV is based on how the company valuates those shares, which may be a much higher value than what they could get if they tried to liquidate those stocks. Plus, some funds may own real estate or mortgages, which are very hard to value.

Sometimes activist shareholders buy up a large amount of shares of heavily discounted CEFs and force the liquidation of those CEFs, in order to realize the net asset value. has come up with a free downloadable Excel database of over 20 CEFs trading at a discount of at least 15% to NAV. Before investing in any of these, check out the web site of the CEFs  to see what  stocks they own, and how many are invested in illiquid shares.

Hopefully, you can find bargain priced stocks in a closed end fund.

Disclosure: Author did not own any of the above at the time the article was written.

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