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Share Sleuth's notepad: Deep Value Investing

Cover of Deep Value Investing by Jeroen Bos A book on Deep Value Investing demonstrates an unfashionable but profitable strategy and LPA, Porvair and Chemring report. Two of them join the Watchlist.

To recap. I examine company results to learn about businesses. The aim is to find shares in strong companies worth holding for the long-term.

But before this week?s results, a review of a book that might help interpret some of them: Deep Value Investing by Jeroen Bos.

Deep Value Investing

Bos, manager of Church House Investment Management?s Deep Value Investment Fund, is an old-school bargain hunter who finds security in a company?s balance sheet, and in particular its current assets, the cash, stock, and receivables that ought to be reasonably accurately valued and easily liquidated if necessary.

Deduct all a company?s liabilities from its current assets and you end up with its net net asset value (net working capital, net of long-term liabilities), perhaps the strictest measure of value because it ignores both fixed assets, plant and buildings, and the company?s earning power. I explain the calculations in this post on Titon, a net-net situation that may be working out well for the Share Sleuth portfolio.

All Bos is interested in is getting his hands on a share of those assets, at a very low price.

Intriguingly, before Bos became a fund manager in 2003, he was broker to Canadian Value Investor Peter Cundill, who died in 2011. A book about Cundill, There?s Always Something to Do, is the only other modern book about deep value investing I?ve read. I recommend both.

Bos? book is slimmer, more parochial, and less biographical. It examines successful, failed and ongoing investments. If you?ve been a deep value investor in the UK in recent years, you?ve been competing with Bos and its sometimes thrilling to read about the same companies examined by another investor. They?re not companies you see written up every day.

Investing in deep value situations can be nerve-wracking. Often you are completely alone, the companies reveal little about themselves, and their results are discouraging. I bailed out of Northamber when I realised it might be the proverbial buggy-whip business, in the age of the internal combustion engine.

Bos gets around the buggy-whip problem by preferring cyclical companies, and service companies. Provided they have the financial strength to endure, cyclicals, like housebuilders, rebound fairly predictably. Service companies, whose main assets are often people that can adapt or be fired, are flexible and more likely to survive bad times.

The trick, with cyclicals and service companies is buying them on those fleeting occasions when they?re cheap enough, and strong enough. Bos? pursuit of housebuilders is particularly revealing, how he waited until they had written off much of the value of their land and recapitalised and still they traded at bargain prices. If I witness another housing crash, I shall reach for that chapter to guide me through it.

I wondered if Bos would mention operating leases, a liability that obfuscates the net net calculation because it?s not on the balance sheet, and he does, although unlike me he doesn?t think French Connection?s leases are enough to dent his investment case.

The book only disappointed me in two respects. At times it relies on reprinted company announcements to tell the story. I can see why, it puts the reader in Bos? shoes at the time he was making decisions, but I?m afraid I skimmed and would have accepted it if he?d paraphrased more.

Also, cyclical companies are like London Buses. The fall into value territory all at once, during recessions. I?d be interested in what Bos does the rest of the time. For Cundill, there was always something to do, but then he was prepared to search all over the globe for bargains.

Bos is an unusual deep value investor in at least one respect, although he buys in deep value territory he often holds a share long after it has exceeded its net net value, preferring to wait until the cyclical companies he has invested in have re-established earnings and enthused other investors.

If you might be interested in how Bos applied the deep value strategy to Spring, Moss Bross, ArmorGroup, Morson, Harvard International, Velosi, and BP Marsh, what went wrong with RAB Capital and Abbeycrest, and ongoing investments in Bloomsbury, MJ Gleeson, French Connection, Norcon and Record, I recommend the book.

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As this brief Youtube clip shows, If Warren Buffett were only managing ?small? amounts of money, he?d be deep value investing.

Bos recommends Richard Oldfield?s Simple But Not Easy, a book I?ve added to my reading list. It?s the 41st unread book to join the investment category.

None of the companies highlighted this week are in deep value territory, but they could still be good value...
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