Deep Value Investing
Deep Value Investing is like paying for the tip and buying the iceberg, an investment strategy that asserts choosing stocks that are cheap and offer great value because not everyone understands investing where the focus is on buying stocks at a much higher discount to intrinsic value. Deep Value investing originated with Ben Graham, known as the father of Value Investing. The core of Value Investing is the practice of investing in stocks which price is significantly lower than their intrinsic value.
Within the deeper classic Ben Graham value model sits a smaller niche philosophy that leverages much of Graham’s teachings but produces far higher returns. That niche philosophy is “Deep value investing.” Deep value investing is an intense version of value investing that focuses on buying stocks at a much higher discount to intrinsic value in comparison to value investing. This results in an increase in the potential reward and risk of the investment.
There are value stocks, and then there are deep-value stocks. The main difference is that deep-value variety is deeply discounted and offers a high margin of safety. For example, investing in ITC with a Price-to-Earning ratio of 20 (which is considered high) may still be considered a valuable investment if you believe its intrinsic value is 30 times earnings. Price is objective; intrinsic value is subjective. If you buy a stock at a price lower than its true worth and you hold it long enough it has very high chances to rise in price. If you buy a bunch of such stocks, your portfolio is highly-likely to beat the market over time.
The objective of Deep Value Investing
The point of deep value investing is to find stocks that are trading for a higher discount to the intrinsic value of their business. In other words, a deep value investor might aim to purchase shares of a company for Rs 0.20 for every RS. 1 of the value they represent. The logic here is that eventually the market will realize the true value of these companies, and this will send their stock prices higher at a faster rate than the overall stock market.
Take legendary value investor Warren Buffett, for example. Buffett never buys stocks because he thinks their prices are going to rise this month or this year he buys stocks because he thinks the underlying business is worth more than he is paying, and he’s willing to wait for years (or even decades) for the true value to be reflected in the stock price.
The substance of Deep Value Investing
Deep value stocks generally will not make you rich overnight and that’s not the goal. If you have heard the expression “slow and steady wins the race,” it is one of the best ways to summarize the strategy behind deep value investing. By mastering to evaluate stocks like these, and to find those stocks trading at a discount to their intrinsic value, you can give yourself an advantage when it comes to buy-and-hold investing. The idea is that over time, the market will naturally correct pricing. Stocks that we buy for less than its true “worth” will appreciate faster than the overall market, producing premium long-term investing returns.
Crucial Deep Value Investing Concepts
- Intrinsic Value
- Competitive advantage
- Margin of safety
- Book Value
- Acknowledge the Risks
- Don’t Forget to Diversify
- Exercise Patience
Risk Element of Deep Value Investing
The primary risk involved in deep value investing is ending up in a’ Value Trap’. The value trap is an investment that looks attractive but may actually be a poor investment. These “bargain” stocks may appear promising, but at the end of the day they are a big letdown for investors and they don’t go anywhere. Investors usually fall prey to the Value trap when they go hunting for a bargain.
Many times what happens is the fundamental problems of the company may not reflect in its financials and the reason could be anything i.e problem with management or lack of growth potential etc. As an investor, we need to be able to spot the reason for the low stock price and if we fail to do so, we may end up in a value trap.
Final Thoughts on Deep Value Investing
Deep Value will continue to work because it had outperformed the general market for over 70 years since Graham and Dodd published their seminal book Security Analysis. Its over performance has not waned albeit the publicity it had and the enormous amount of research in the field. It is our belief that as long as humans make investing decisions, they will continue to over-react to bad news and temporary bad financial results.
Deep value investing can bring in huge rewards if you are willing to take a calculated risk with meaningful diversification and patience.
All the best for your future investments, Cheers!!
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What a wonderful article written on Deep value investing !!!!