Book: Deep Value Investing
Author: Jeroen Bos
Key takeaways: Jeroen talks about investing how Ben Graham first postulated it (net-nets, where it’s almost impossible to lose your principal, and stocks when they’re trading at a vast discount to the underlying assets).
First, what not to do?: It is easy to see a stock trading at substantial discount to the value of its assets, and though it looks statistically cheap, it can be very misleading if the value is tied up not in current assets, but in (slowly getting obsolete) fixed assets. In these cases, the Net Asset Value eventually joins the share price as losses accumulate and margin to safety slowly but surely evaporates. This is why many ‘heavy fixed assets’ stocks are typically not good investments.
If not ‘heavy fixed assets’ stocks, what then?: Recruitment firms, financial services, consultants, house-builders etc. are usually heavy on current assets and light on fixed assets and their price movements can be quite cyclical, which means that there can be opportunities to buy them at significant discount at some point. It is extremely rare to find a company at working capital levels that is profitable and debt-free, but if you find it, that’s ideal.
How to Evaluate Current Assets?:
- When evaluating receivables etc, it is very important to look at company’s clients, including the biggest clients and they concentration.
- Be wary of any overdrafts as they can be called immediately by the bank, putting the company in great trouble.
- Do not ignore key personnel risk, and keep an eye on board communications.
- One can easily jump into the stocks too early. If it is a industry-wide weakening, it often behooves to wait for the industry pain to manifest itself, and see which company announced big write-downs and perhaps rescue financing.
- Once stocks have gone through an extended period of price weakening, they enter a twilight zone where further even small bad news could cause disproportionate damage to the already weakened price. Once one keeps this in mind, one would get less nervous if the price capitulates further after a buy.
Selling Discipline: THIS IS THE BEST SELLING ADVICE I HAVE READ. Jeroen says that as the share price starts rising on improved earnings, he CEASES to be a value investor, and does not sell when the prices reach his estimated NAV. He says that once the market turns up, he knows he will be selling into an earnings driven market and he wants to maximize his profits by waiting for solid earnings.