A cynic is man who knows the price of everything but the value of nothing.
– Oscar Wilde
In 1934, Benjamin Graham and David Dodson paved the road for all value investors with their contribution of “Security Analysis“. Graham went on to publish “The Intelligent Investor“, the book that heavily shaped Warren Buffett’s life. Some decades later, a short practical book on value investing, “Deep Value Investing” by Jeroen Bos strongly compliments the classics by Graham and Dodd.
Deep Value investing is also known as the cigar-butt investing style that Buffett had famously, and successfully practiced during his earlier days. To begin, we compare the stock’s price with its net asset value (NAV), or in other terms, a stock that is selling for less than its working capital. The focus of deep value investing is on assets, particularly liquid assets. Deep value investors look for stocks whose current assets minus its total liabilities are worth more than its current stock price or market capitalization. The logic is that if the company were to shut down, liquidate all its assets, repay debtors and redistribute all wealth to its shareholders; you would still walk away with some profit, leaving you with a substantial margin of safety.
To make things better, we know that the current assets minus the total liabilities is still worth more than the market price. This means that the long term assets (equipment, long term investments, etc.) are essentially “free”. Of course, deep value stocks are rare, and falling prey to value traps is always possible. Therefore, deep value investors must evaluate every detail of the company’s information along with possible catalysts.
Author and fund manager at Church Investments, Jeroen Bos provides 15 exceptional case studies of his own investment ideas in this book. He walks the reader through not only his successful, but equally important, his failed cases of investments allowing readers to learn from his mistakes. For each of the 15 companies explored, Bos provides a company background, an investment case and the outcome of his decisions. He further provides exit reasoning for his stocks; an added value for the reader.
In his writings, Bos explains the benefits of service-based sector stocks. Service firms are flexible, they can contract and expand alongside its economic environment. Well managed service firms are likely to sustain recessions (by nature; unlike manufacturing and machine-heavy firms, their expenses are not fixed, so they just lay off workers to cut their expense in order to survive through economic storms).
Moreover, Bos augments the prioritization of assets (balance sheet), as earnings (income statement) and its expectations can be manipulated (quite legally) which may result to poor valuations. Other interesting aspects the reader will appreciate is Bos’ unique style of deep value investing: occasionally, he holds deep value stocks even after its gone up past its fair value (and he explains his reasonings). Throughout his investment cases, Bos illustrates that the long term is what matters, that deep value investing, at its very core involves limiting the downside while having a substantially high upside potential, and is not as risky as the crowd believes.
Perhaps the most important lesson that Bos reinforces; is that there are no golden rules in deep value investing, all variations can be appreciated and every investment case has its own unique merit. It is virtually impossible to find a “perfect” deep value stock, as they all come with their own distinctive history and, as Bos describes,”their negative baggage”.
All in all, deep value investing involves swimming against the tide, buying stocks that are beaten up, and selling them when everyone else is buying. Jeroen Bos’ contribution is nothing short of exceptional, and definitely and eye opener for newer investors. Of course, deep value is more detailed than this post has intended to explain. Bos’ provides the reader with an invaluable perspective, rather than strict formulas and quantitative valuation methods. I would recommend deep value investing be practiced by more seasoned investors, and not the novice (but it doesn’t hurt to know). You can find this book here.
As I started with a quote from Oscar Wilde, it is only plausible that I close with one. If you are an investor seeking deep value stocks, you will find this particular analogy interesting.
The only difference between a saint and a sinner is that every saint has a past and every sinner has a future.