Review: Deep Value Investing by Jeroen Bos
Value investing is often misunderstood as just looking for stocks with a low p/e ratio, relative either to the market or a specific sector, and assuming that they will be undervalued more often than not. People convince themselves that they are being clever, when much of the time they are just being contrary.
The Washington post Value Investing Net-Nets
Dutch value investor Jeroen Bos?s upcoming book Deep Value Investing gives practical advice on how to identify actual value stocks ? companies where the stock price is undervalued relative to assets. In the ideal scenario (and Bos assures us the ideal scenario never actually comes along) a value stock is like buying a c-note for $90. Your position in the company is demonstrably worth more than you paid for it.
?It is perfectly possible to find statistically cheap stocks that are nevertheless remarkably poor investments. Comparing a stock?s price with its net asset value (NAV) is an important first step, but it does not tell you all that you need to know. A company?s net assets may comfortably exceed its stock market capitalisation, but the nature of those assets can complicate things,? writes Bos. ?Statistically they are cheap. But, crucially, it is difficult to see how the gap between the net asset value and share price can be closed.?
Deep Value Investing isn?t written for the novice investor
Deep Value Investing isn?t written for the novice investor, nor does it try to replace Graham?s The Intelligent Investor, which Bos recommends highly. Instead, Bos is explaining a specific strategy (usually played out in the service sector) that he has put to good use repeatedly over the years.
?Deep value investing, at its simplest, is where assets are purchased at a deep discount to their real worth,? Bos explains. ?This can require a good deal of patience. It takes time to find the right company, and it takes time for the company to come good. So deep value investing is not conducive to buying no matter the investing climate. Nor is it about being a ?busy? investor.?
Instead of trying to come up with artificial rules that cover every possibility, Bos gives readers a basic framework that can be adapted to different situations. What he offers isn?t a ?system? as much as point of view on what it means for a stock to represent good value.
The core of the book is a set of 15 case studies where Bos walks the reader through actual investment decisions that he has made: many that brought in strong profits, some that went bad, and a few positions that Bos still holds. In each case he explains what first brought the company to his notice (combing through 52-week lows seems to be a common strategy), how he reached his valuations, and how the deal worked out.
Sometimes those stocks have already fallen well below what Bos is willing to pay, and sometimes he has to wait months or years until the right deal comes along. Although he doesn?t mention it, you have to imagine that Bos has a considerable list of interesting stocks that he would like to buy if the price ever comes down.
Value investing requires persistence and some amount of fortitude
Importantly, Bos also explains how he exits a value stock once he?s bought it. Value investing requires persistence and some amount of fortitude as companies that the rest of the market have given up on try to recover, but it?s also important to recognize when you?ve put money in a value trap and you just need to get out. On the other hand, when he sees one of his stocks start to rally and turn into an earnings story, he won?t sell just because it?s no longer a ?value stock.?
Not every investment that Bos describes works out, but what?s important is the argument behind them. By following Bos?s logic in the different case studies, the careful reader will have the tools to weigh the pros and cons of other stocks that look like they might be a bargain.
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