Deep Value Investing | Tobias Carlisle | Talks at Google

TL;DR

Deep value investing seeks stocks priced well below their intrinsic value, including losing companies with failing businesses and uncertain futures that may offer unusually attractive potential. Tobias Carlisle explains Benjamin Graham’s distinction between market price and intrinsic value, evidence from a global universe of 22,000 positions, behavioral sources of undervaluation, and quantitative methods for limiting investor bias. Read on to understand the philosophy, historical evidence, and mechanics of mean reversion.

Transcript

MALE SPEAKER: Welcome, everyone. We have a very special guest here today with us, Toby Carlisle. Welcome to our Talk at Google, at Author series. He's going to be talking about his new book, "Deep Value: Why Activist Investors and Other Contrarians Battle for the Control of Losing Corporations". Toby has a unique perspective on value investing, muc... Read More

Key Insights

• 👨‍💼 Deep value investing focuses on buying undervalued stocks with failing businesses and uncertain futures.
• 😨 Behavioral factors, such as pessimism and fear, can cause stocks to become undervalued.
• 🆘 Following a quantitative model and avoiding behavioral errors can help investors identify undervalued stocks.
• 📈 The acquirer's multiple is a useful metric for assessing the true cost of acquiring a company.
• 👍 Deep value investing has been proven to outperform other investment strategies in various markets and time periods.
• 💋 It is important for investors to stick to their chosen strategy and not be swayed by market trends or emotions.
• 🎁 Undervalued stocks may not always revert to their intrinsic value but can still present attractive investment opportunities.

Questions & Answers

Q: What is deep value investing?

Deep value investing means buying securities whose market prices are substantially below their estimated intrinsic values. It can include losing stocks with failing businesses and uncertain futures because those conditions may create unusually attractive investment potential.

Q: How does Tobias Carlisle define the difference between market price and intrinsic value?

Market price is the observable price of a security on a given trading day, while intrinsic value reflects what the security is fundamentally worth. Carlisle notes that price fluctuates more than intrinsic value, which tends to move more slowly.

Q: Why can failing businesses become deep value investments?

Pessimism and fear can push a stock’s market price below its intrinsic value. Carlisle’s counter-intuitive argument is that losing stocks with failing businesses and uncertain futures can sometimes offer unusually attractive investment potential.

Q: What did Benjamin Graham find after the 1929 stock market crash?

Graham reported that 200 of the 600 stock-market issues he studied traded below their liquidation value. A sizable portion also traded below their net cash backing, meaning the entire company cost less than the cash remaining after its liabilities were paid.

Q: How are intrinsic values estimated in the talk?

The talk describes John Burr Williams’s approach of examining all expected cash inflows and outflows. Discounting those amounts back to the present produces an estimate of intrinsic value.

Q: What evidence does Tobias Carlisle give that cheaper stocks outperform?

Carlisle describes ranking a global universe of 22,000 positions using price-to-cash-flow, price-to-book, and price-to-earnings measures. After averaging those rankings and dividing the stocks into five groups, the cheapest value quintile tended to outperform while the most expensive glamour quintile tended to underperform.

Q: How can investors reduce behavioral errors in deep value investing?

The page recommends following a quantitative model rather than relying entirely on personal judgment. Predetermined rules can help investors avoid being swayed by pessimism, fear, market trends, or emotion.

Q: What causes an undervalued stock to return toward intrinsic value?

Benjamin Graham called the closing of the gap between price and intrinsic value a mystery. Carlisle frames the process as mean reversion and begins examining its mechanics, including general improvement in the company’s industry.

Summary & Key Takeaways

• Deep value investing is based on the philosophy of buying stocks with intrinsic values that are higher than their market prices.

• Behavioral reasons, such as pessimism and fear, can cause stocks to become undervalued and present investment opportunities.

• Avoiding behavioral errors and following a quantitative model can help investors identify undervalued stocks and generate strong returns.