Deep value investing is a kind of value investing that compares the price of a stock to what it’s really worth. Rather than looking at a stock as a very long term investment in a fantastic company, a deep value investing approach looks to repeatedly take advantage of a stock priced at a discount to its intrinsic value.
Deep value investing relies on the mean reversion concept of stock prices, mainly that the prices in the stock market can swing wildly and stray from a stock’s true value for a time. A deep value investor recognizes that the emotions in the market tend to be temporary, and will confidently buy a beaten down stock until its price returns to more rational values.
If you have listened to Andrew and Dave’s Podcast, The Investing for Beginners Podcast, or have read any of my blogs before, then you likely know that we’re all very high on the thought of value investing.
You’ve likely heard of Warren Buffett as being one of, if not, the most successful investor of all time, and he swears by value investing. In his early days, Buffett was a major practitioner of deep value investing, often taking an activist role in the companies he invested in.
But outside of a big name like Buffett, there have been many other investors who’ve found great success while taking a value investing approach. This post is about my “Super 6”—deep value investors not named Buffett, Munger, Lynch or Graham. Note that these are not listed in any specific order as each one of them has their own varying ingenuity that they bring to the deep value investing game. Let’s get going!
Shelby Cullom was a very early investor and founded his brokerage firm, Shelby Cullom Davis & Company in 1947. Cullom tried to follow in the footsteps of Benjamin Graham and sought to find stocks that were undervalued at that time, as well as having a great dividend. (Sound familiar?)
Cullom turned his initial $50K investment into a $900M fortune, and his son followed in his footsteps with an even greater return! Cullom always was one to particularly focus on a margin of safety and is very well known for that. As he once said, “You make most of your money in a bear market; you just don’t realize it at the time.”
With such a focus on price and finding that discount to intrinsic value, it’s safe to say that Cullom’s approach embodies the general philosophy of deep value investing, buying a cheap stock and waiting for its price to catch up.
Joel Greenblatt started Gotham Capital in 1985, attaining 34% annualized returns in the first years of the company’s history. Joel has produced many popular books that you might have likely heard of, such as The Little Book that Beats the Market and You Can Be a Stock Market Genius. In the Little Book that Beats the Market, he talks about his investment strategy called ‘Magic Formula Investing’.
He has a website regarding this process (link) but the book is available on Amazon for purchase as well, and highly recommended. His magic formula identifies stocks that are cheap on a relative and absolute basis, and quickly reallocates the portfolio to maximize the benefits of a deep value approach… capturing the difference in the margin of safety quickly and efficiently.
One of my favorite Joel Greenblatt quotes are below, and if this doesn’t summarize everything that Andrew, Dave and myself are trying to accomplish, then I’m not sure what will!
“So, one way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety. The upside, while still difficult to quantify, will usually take care of itself. In other words, look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.”
“Buy straw hats in the winter, when nobody wants them, and sell them in the summer when everybody needs them.”
Go ahead and tell me that this is not the exact concept of value investing. What an amazing quote by Kenneth Fisher. Kenneth Fisher is the founder and chairman of Fisher Investments, and frequently is a columnist for many different publications.
Fisher’s most well-known work was when he analyzed the price/sales ratio in his book, titled Super Stocks. This book showed potential investors how to use innovative techniques and quantitative analysis to evaluate the future potential for a company. Price to sales is a great example of the types of metrics that deep value investors use to identify stocks that are temporarily or unfairly hated by the market.
Fisher has written 11 books in total with the most recent in 2015 titled Beat the Crowd: How You Can Out-Invest the Herd by Thinking Differently. In 2010, Fisher was included in Investment Advisor magazines list of the 30 most influential investment advisories in the last 30 years. You’ve probably noticed by now that I really like quotes, but Fisher has a ton of good ones, so I have to end on another…
“…it’s a good idea to remember that whenever there is a buy and a seller, somebody is wrong. Make sure it’s not you”
Tobias Carlisle is the Principal at Acquirer’s Fund, LLC. Prior to that, Carlisle was an analyst for a company on the Australian Stock Exchange and a corporate advisory lawyer. He has written multiple books, with the most popular being Deep Value which can be found on Amazon, at this link.
Deep Value is a book that will offer a contradictory view to many in the stock market and provides evidence that when conditions are bad, it can present a very unique buying opportunity. The book has both anecdotes and industry research to show the methods of the deep value investing strategy and how it was developed and how it can be successful in the future. I highly recommend the read.
Carlisle has said before that he has eight rules for deep value investing, and they all really resonate with me. See below:
- “Zig when the crowd zags”
- “The bigger the discount, the better the return”
- “Find a margin of safety”
- “A share is an ownership interest, not just a ticker symbol”
- “Too much growth and profit may not be a good thing”
- “Simple, concrete rules help us avoid errors”
- “Be prepared for the concentration trade-off”
- “Maximize after-tax gains for the long run”
Man, those really are some legit words of wisdom. If you can follow those, you will be setup for success in your financial life. And to end Carlisle’s section, let’s go out on a bang…
“Why do fair companies at wonderful prices beat wonderful companies at fair prices? Because great businesses don’t stay great. They only look great at the top of their business cycle. Mean reversion pushes great business back to average”
Bill Miller is most known for the mutual fund that he ran at Legg Mason from 1991-2005, where it beat the S&P 500 for Every. Single. Year. That is just absolutely insane, if I do say so myself. While he was there, he managed $70 billion in assets. He currently is at Miller Value Partners, which is his own firm in Baltimore, MD.
One of Miller’s famous quotes regarding value investing, and the need to make sure that you spend the time to do your own quantitative analysis, is below:
“To the extent that value is based on a simple calculation about ratios, that’s a very simplistic definition of value,” Miller said. “If people are buying things they haven’t analyzed … it’s not likely to end well.”
Seth Klarman very closely follows the Benjamin Graham thought process and has been compared to Warren Buffett frequently. He is the chief executive and portfolio manager of the Baupost Group, managing $27 billion in assets. Since inception in 2008, the firm has realized a 20% compounded return on investment. Not too shabby.
Klarman always seemed to have a knack for the stock market as he purchased his first stock, Johnson & Johnson, when he was 10 years old.
He had this quote about value investing, which might be the most beautiful thing that could ever be said about investing:
“Firstly, Value investing is intellectually elegant. You’re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase high fliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it’s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock.”
Klarman has written one book, which was published in 1991, titled Margin of Safety: Risk-averse Value Investing Strategies for the Thoughtful Investor. For the heck of it, I checked how much it was on Amazon….$801 for a used copy of the book. Wow.
Each one of these value investors have something very unique to bring to the table and a ton of great knowledge.
Fortunately for all of us, most of them like to spread their knowledge and have written multiple books, as well as having some podcasts, blogs and other avenues for you to learn more about their past trials and tribulations.
Hopefully you have really felt inspired by learning about one, or all, of these great value investors and are eager to learn more and make the plunge further into the value investing world!