Must Read: Deep Value Investing by Jeroen Bos

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.

-Oscar Wilde

5 Must-Read Investing Books

The most successful leaders always had one thing in common: they never stopped learning. As Charlie Munger, Vice Chairman of Berkshire Hathaway puts it:

Those who keep learning will keep rising in life

If you’re looking on improving your investing knowledge, you’ve come to the right place! Here are the 5 must-read investing books:

1. The Intelligent Investor by Benjamin Graham

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Benjamin Graham forever changed the investing world with this timeless contribution. He builds the foundation of value investing by providing the concept of Mr. Market, defensive investing and margin of safety. This iconic book is considered by many the bible of investing, and for Warren Buffett:

“I picked up a copy of The Intelligent Investor. It not only changed my investment philosophy, it really changed my whole life- I’d be a different person in a different place if I hadn’t seen that book…it was Ben’s ideas that sent me down the right path.” 

Pick up your copy of this classic: here.

2. The Most Important Thing Illuminated by Howard Marks

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Howard Marks shares his thoughts on value investing in this mind-shattering book. He gets straight to the point on investing subjects such as second-level thinking, market efficiencies, value, contrarianism, risk, randomness and the other aspects that make up the 20 most important things. To make this book even better, there are even commentaries from other leading investing managers such as Seth Klarman, Christopher Davis and Joel Greenblatt. Marks’ work is even praised by legendary founder and former CEO of The Vanguard Group, John C. Bogle:

“Few books on investing match the high standards set by Howard Marks in The Most Important Thing…If you seek to avoid the pitfalls of investing, you must read this book!”

Find this invaluable book: here.

3. A Random Walk Down Wall Street by Burton G. Malkiel

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Burton G. Malkiel’s best seller is jam-packed with quality investment insights and financial history. It takes a look at stocks and their values, analyzes both fundamental and technical analysis while comparing them to the random walk theory. Furthermore, he explores the concepts of EMH (efficient market hypothesis), smart-beta and rebalancing. He puts much emphasis on indexing and diversification through no-load, low cost funds and ETFs. The later chapters consists of personal finance and investing strategies for different age groups. Whether you’re a starter or expert in investing, this book is a must-read. Find it: here.

4. Common Stocks and Uncommon Profits by Philip A. Fisher

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Known as a pioneer of Growth Investing, Philip A. Fisher’s contribution to the investing world will not be forgotten. In this book, consisting of 3 parts, he lays out the a general description in what to look for in stocks, and when to buy. He opens the book with his concept of “Scuttlebutt”, then puts in 15 detailed points to look for in common stocks, as well as 10 investor don’ts. In the second part, Fisher outlines his 4 dimensions in which he describes cues to look for in companies, such as the company’s superiority in production, research, marketing and financial skills. He notes the importance of employees and management, investment characteristics of certain businesses, conservative investments and much more. Fisher closes the book with his philosophy along with its evolution that has made him one of the most influential investors. Find this book: here.

5. Technical Analysis of the Financial Markets by John J. Murphy

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John J. Murphy provides the fundamentals of technical analysis in simple enough terms for anyone to understand. You’ll learn the trends and essentials of chart analysis. This book gives excellent graphical examples of various price patterns and reversals. Furthermore, it teaches the basic methods of analysis, you’ll learn about moving averages, MACD, RSI, Bollinger Bands, and all the other fancy technical indicator terms. Whether you’re a beginner or experienced investor, this is a classic for the technical investor. Find it: here.

Through chances various, through all vicissitudes, we make our way…

-Aeneid

Those are the first words printed on The Intelligent Investor. I read this timeless classic some years ago and this quote made an impression on me. I’ve revisited it twice since, and every time I read it, not only does it get better, but I appreciate this quote more and more.

If it’s your very first time reading The Intelligent Investor, know that I am envious of you, the feeling of learning new knowledge of this quality is rare, and no words can describe that state of enlightenment. I invite you take your time and enjoy the invaluable information you will gain. I hope you will enjoy it as much as I have, and that you will revisit it in years to come.