Any of you guys pick stocks this way? Can you recommend books or blogs about this topic? Thanks.
Heh, Freudian slip? Are you talking about “You Can Be a Stock Market Genius”? Yeah, that is pretty good.
What’s the difference between value investing and deep value investing?
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We used to have a member called Frankie Arabia. He was considered the best deep value investor (pound for pound).
RIP frankie.
I don’t consider myself a “deep value investor,” which, while traditionally defined as buying a company with a deep discount to intrinsic value, also is often accompanied with the reality that a lengthy time horizon (well over one year, often 2+ years) is necessary for Mr. Market to figure out the deep undervaluation. I’m more of a catalyst-driven investor and need to see a path to value typically in a 12-18 month horizon for longs, and 6-12 months for shorts.
That said, there are a lot of “deep value” principles I think about in my own investment process. If you’re focused on learning deep value, definitely look at Graham, Buffett, and Klarman as your starting point. Tweedy Browne & Co has also published a lot of stuff about deep value investing over the years. Greenblatt is good too - “You Can Be A Stock Market Genius” is a must-read for special situations, and “Competition Demystified” is a much more readable and applicable form of Michael Porter’s “Competitive Strategy” (neither of these are directly “deep value” related, but in my view it’s incredibly important to understand competitive dynamics in order to know the difference between a value trap and a misunderstood or de-risked asset.)
Deep value investing as a few common characteristics, and it’s a pretty strict style of investing:
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Investments are usually low quality firms, maybe bad industries, can be distressed etc.
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Portfolios are very diversified. You may own tons of stocks with miniscule positions in each.
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You sell once it reaches IV.
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Philosophy is built around a very mechanical mindset. Not as much business analysis.
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You don’t really bother with looking for catalysts.
IMO, you need to be a certain type of person to be really good at DV investing - aka very cheap, and by cheap I mean, “people who grew up in the Great Depression” cheap. It is the exact opposite of buying a concentrated portfolio of high quality names and holding for 10+ years.
Not many people do this style of investing, but if it suits you, it can be very worthwhile.
This makes up a portion of our portfolio, but we typically don’t get too crazy with it - buying companies below net cash or a few other metrics. I guess the way I’d think of it is that “value investing” is that something is cheap, relative to things like sales, earnings, book value of assets, cashflow, average earnings per share, etc.
“Deep value investing” to me means that something is quantifiably cheap relative to its net assets, and you have been insanely detail oriented in getting accurate values for the companies assets, especially the ones that most people don’t closely examine. Can’t get an accurate value? DO SOME MORE RESEARCH. Still can’t get an accurate value? Adjust it downwards or eliminate it. You might value all liabilities at face value and then adjust the listed assets of the firm by various discount factors until you’re left with an EXTREMELY conservative estimate of the firm’s net assets.
For example, you might take drybulk shippers biggest asset (HINT: THIS IS SHIPS, THEIR BIGGEST ASSET IS THE SHIPS THEY OWN, GUYS I FOUND, IT I DID IT) and instead of valuing those ships as operating PP&E, you figure out what the scrap value of the iron and steel in those ships is, assuming that management throws in the towel and decides that the assets might look better on a beach in Alang. You pencil it out and hey, presto, looks like this drybulker is trading for less than the scrap value of its ships (after we value all the liabilities as money good).
“HOLY CRAP”, you think to yourself as you adjust your suspenders and monacle, “That’s probably worth owning. Maybe it’ll go up some day.” A further note should be made here about companies that are losing money: deep value gets much harder, because the cash (which you probably valued as money good) is now shrinking every day, so you’ve got to estimate how bad that might get.
And then when your analyst friends ask you about “what’s the catalyst”, you stare at them a little blankly and stammer out something about having a conference call that you should be on, because (as someone kind of mentioned earlier I think?) when you have a pretty darn good deep value thesis, you just buy the damn thing. An opportunity will eventually arise if you were right. It might take 10 weeks or 5 months or 3 years, but hopefully if you were right, something comes up and you can exit the position at a gain. Who knows, depending on “how cheap you bought it” and “how long you held it” and “how you eventually exited the stake”, you might have even done pretty nicely.
In response to what Palantir said, yeah, this style of investing seems to attract a certain style of person. You need a head for numbers, a tolerance for minutiae, and the ability to be OK with looking spectacularly stupid for long lengths of time.
In response to Steely Dan’s original question : I am struggling to think of any good books on the topic. I would certainly start by running screens and doing this for a few hours a month; there’s nothing like practicing this skill to help you learn it.
EDIT: As Numi mentioned - Klarman’s written about this, and I believe Baupost has done quite a bit of deep value investing over the years. Margin of Safety, as well as plenty of published interviews and videos of Klarman, he talks about a few situations he’s done over the years. I think he talked (if I’m not misremembering) about cutting his teeth with Michael Price at Mutual Shares. They bought some downtrodden railroad stock and Michael Price knew the value of all the steel in the railway tracks, or some such crazy detail.
I’m not sure I really agree with this. I would not consider myself a deep value investor, but I own a lot of stocks in small positions and have a statistical backdrop that guides (but does not determine) my investment decisions. I often hold the stocks for a couple of years, practicing time arbitrage. I rarely buy stocks at liquidation value though.
To me a good example of a deep value stock would be TECUA under $5. The firm I used to work for bought some and I went to visit the company. I practically had to kick the door in to get a meeting and they had not met anyone in over six months. There wasn’t really any reason to own the stock per se – it was A class / B class with an unfriendly B class, the company was losing money and had done poorly forever, they had chronically disappointed even patient value investors, and there was no catalyst in sight even though Roumel was trying to get something done (but was being ignored). But the stock was quite cheap, just that it was “meh” in every other way.
That’s deep value – if you look at it and say, this is really cheap, but wow it turns my stomach, then you’re in deep value territory. The difference between deep value and a zero is usually how much debt the company carries as well as the overall structural quality of the business. TECUA is not a structurally good business but it’s not horrible either if they could (finally!) get their act together.
Deep value is like the deepest, darkest part of the ocean where few species can survive. It’s “below value investing” in the sense that there really is no natural shareholder base at all and the stock is completely left for dead. If the stock is “merely” cheap, there will be a base of value investors that own it. It’s not the worst strategy in investing because you have value on your side and value wins over time, but it’s suboptimal because you can end up waiting a long time for something to happen (no reason to own it now except value, which is not enough).
I disagree with Palantir because most deep value firms are fairly concentrated – they’re making big, out of the money bets. There are very, very few funds that I know that make systematic, highly diversified bets in deep value stocks based on statistical criteria. Deep value guys typically know business very well.
Deep value very tough. There is a firm Nuveen Tradwinds that does this. They buy so much crap on the way down. Almost like private equity if one of them hits, makes up for the other 10 value traps. Their holdings are on bloomberg too: http://www.nuveen.com/Tradewinds/Approach.aspx
I think if you wear a monacle you’re more than OK with looking spectcularly stupid. Suspenders, on the hand, are a completely different story.
Also, thanks so far guys. Getting some good reading out of this thread.
Someone’s jealous of my outfit. Glad that some of my ramblings might’ve helped - perhaps the recent volatility will give you some interesting candidates to try your luck with.
Interesting thread, guys. Thanks for all the value being shared 