The Power of Ruthless Deep Value Investing

I do this little exercise a couple of times a year on average.

I am going to tell you something that flies in the face of everything you believe about investing.

If you took investing and finance classes in college, this little experiment would make your professor mad enough to spit.

If you are a true believer in indexing, you will hate my little experiment.

If you think that trading in and out of whatever is hot today is the way to go, then this little experience will make you angry at yourself, mostly for spending so much time in front of a screen screaming at little blips that refuse to dance across it in the manner you prefer.

Keep in mind that stress and sitting are the new smoking and gravy, and you are consuming mass quantities of both on a regular basis.

If you are a member in good standing of the Church of Buffettology, you will not care too much about the results, either.

Let me begin with a statement that is bound to stir some controversy…

Value investing is NOT dead.

It was never even a little under the weather.

The fact is that value investing, as Ben Graham conceived it, a young Warren Buffett practiced it, and Joel Greenblatt used it before he became a bestselling author and ETF purveyor, is alive and well.

Here is another fact that the traditionalists among us may not adore:

Maximizing the return from deep-value stocks is not necessarily a buy-and-hold affair.

There are two elements to achieving maximum returns as an individual investor practicing a deep value approach:

1. Credit
2. Valuation

Our approach is simple: We will buy companies with excellent fundamentals and a strong credit profile.

We are only going to buy these companies when they trade below tangible book value. That leaves out goodwill premiums, brand value, trademarks, and other esoteric assets that are not in the physical realm.

It is the value of all the stuff a company owns minus what it owes.

We will pay a discount to that value for our shares, and the bigger the discount, the better.

If the business’s fundamentals begin to deteriorate or the credit profile weakens, we will sell the stock and move on.

If the stock trades above book value, we will take our profits and move on.

We will prune our portfolio once a month, and we will be ruthless.

There will be no “It will get better” or “Let’s see how much higher it can go.”

A stock meets the conditions, or it is sold.

Over the last decade, $1 in the S&P 500 has turned into $3.62.

Using our ruthless deep value strategy, that same dollar becomes $7.05.

Over 1, 3, 5, 10, 20, and 25 years, the deep value approach has crushed the indexes.

During the lost decade of 2000-2010, when index and technology investors struggled to break even, you would have multiplied your money by 20x.

You will average about 25 stocks in your portfolio.

Unlike the buy-and-hold-forever club, you will sell and replace 5 or 6 of those most months.

Why isn’t everyone a ruthless deep value investor?

It is boring.

You will never own the most exciting stocks.

You will trade once a month. Not every day. Not every hour. Once a month.

Right now, the hot stocks are the Magnificent Seven. These are outstanding companies that are going to play a role in reshaping the world via artificial intelligence.

Meme stocks are flying around your screen like a pinball every minute of the trading day.

The chat room is alive with talk of looming FDA decisions and imminent merger announcements.

Bill Gates is buying this penny stock that is developing flying cars that cure cancer while you drive around town.

None of this will be part of your day as a ruthless deep value investor.

If you go into a chat room and discuss the iron ore and steel companies you just bought, you will be laughed off the screen.

Bragging about the furniture manufacturer you just snapped up for less than book value is likely to cost you your day trader card.

Last year at this time, they would have been bored silly when you told them about the two hand tool manufacturers you picked up for less than asset value.

They may have paid more attention when you told them they were both taken over in just a few months and doubled your money.

Do I think that telling you this will make a bunch of you become ruthless value investors?

You should, but I doubt that I will gain a flood of converts.

Truth be told, a non-zero number of you fell asleep when the word “value” appeared in the conversation for the first time.

What I hope I managed to achieve is to wake you up to the idea that there are far more profitable ways to invest and even trade your money than being a part of the mainstream retail crowd.

We will discuss more strategies HERE for using momentum, quality, growth factors, and value to balance your path to extraordinary profits.

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