2025 Beginners Guide To Deep-Value Investing
Insights and advice from a business-minded investor implementing the deep-value approach, full time.
Mr Deep-Value also offers:
Dirt-cheap access to Bloomberg’s No.1 competitor
Separately managed accounts for US clients
You’ve read the intelligent investor and are convinced that Ben Graham strategies are the world's greatest wealth-hack.
Super investors like Walter Schloss, and Peter Cundill have inspired you to believe that literally anyone with a brain cell and some healthy aversion to risk can succeed.
You’ve read about all the academic reports showing the efficiency of buying statistically cheap stocks.
You’re ready to go all in, and commit your life-savings to the deep-value approach.
But, there’s something missing.
Some nagging questions, in the back of your mind, that none of the books or quotes or partnership letters seem to answer.
Things like:
What exactly should a portfolio of deep-value stocks look like? How many should it be?
What are the drawdowns like? How does it move?
What kind of performance is ‘normal’ and what would indicate that I was doing something wrong?
How does the portfolio performance compare to the general market? Should it be correlated or uncorrelated?
How could I be totally sure that the stock I was looking at really was a good deep-value opportunity?
What about value-traps? Am I about to pour all my money down the drain? Should I just buy Tesla like everyone else?
Of course, I followed the same path.
I read all the books.
For the purposes of sounding intelligent (and possibly assisting my SEO rankings), here’s a list of some of those books:
The Intelligent Investor, Security Analysis, One Up on Wall St, The Little Book That Beats The Market, The Essays of Warren Buffett, The Snowball, Margin of Safety, Dhando investor and I can’t be bothered to keep going...
I bought myself a kindle and gobbled them all up, one by one.
I also watched videos, and podcasts, and read interviews and dug up old recordings of Walter Schloss talking to university students, and Warren Buffett being interviewed by newspapers.
I noticed a few thoughts occurring to me:
Most of the modern books are incredibly short. It’s like the process is so simple, that they can’t think of much more to add.
The amount of random people that stumbled into the deep-value approach, implemented it patiently, and became centimillionaires is astounding.
If deep-value investing is so simple, why isn’t everyone doing it?
I have literally no idea why people pay thousands of dollars for margin of safety. It doesn’t tell you anything different to all the other books.
But, none of this research told me what to expect after I actually created a portfolio of deep-value stocks.
Despite reading ravenously, I was still starving for more context and a deeper understanding of how it all works in the real-world.
It’s probably important to note here that, at this point, I had sold my previous businesses and was about to go all in.
I was excited and suspicious and nervous and awestruck, all at the same time.
I wasn’t looking for an ‘investment strategy’, I was searching for a better ‘business model'.
Deep-Value investing (to me) seemed to be a business of ‘buying and selling businesses’.
The brokerage account is a business dealership or store, and the stock-market is my sole supplier and customer.
Later on, you can start buying activist stakes to exert more control over each position, and finally, you can buy the entire business and use its future cash-flows to buy more.
A virtuous cycle of compounding your very own business empire.
The only thing needed, in order to scale up the business (to infinity), is more capital.
To somehow overcome this weird mix of emotions, I decided to go all in, gradually.
I spent the first few years, adding capital, watching the portfolio and then adding more capital.
Over time, my questions were answered and I figured it out.
I now understand why almost no one else replicates the model, despite the fact that it really is deadly simple.
And yes, I still consider it to be the greatest business model ever invented.
Allow me to explain…
Why Deep-Value
Before I discovered deep-value investing, I bought and sold small businesses in the real-world.
It started by accident.
I built my very first business and wanted to move away from the area. A friend suggested that I sell the business to his dad.
So I did.
I remember holding the cheque from that sale in my hand and thinking it was the most money I’d ever seen in my life.
After several years, I was running a new business, and was offered the chance to buy another business.
It was a good fit, so we did a deal.
Later on, a friend of mine was trying to do something similar and buy a business that could bolt into his existing business.
He asked me for help with the negotiations.
For some reason, buying and selling business just became a thing that I did, over the years.
Eventually, I decided to make that my business.
I was a professional currency trader at the time, and was sick of the long hours and stressful, unhealthy lifestyle.
I wanted out.
In my mind, the best investment strategy was one where I’d own lots of hands-off businesses, and use the cash flow from them to buy more and more.
So, I printed some business cards, and started looking for businesses to buy.
It was a disaster.
First, finding deals was virtually impossible.
People that want to sell their businesses, usually go to a business broker, and get told they can achieve silly valuations.
The valuations don’t stack up when you’re actually trying to organise financing and repayments, using the businesses cashflows.
The broker doesn’t care, because they’re only interested in signing the client and receiving the up-front fee.
Then, there are the people that never really thought about selling until you mentioned it to them.
These people have usually watched a few too many episodes of billions, and have all sorts of weird expectations.
To illustrate:
I once spoke to a guy with a business that turned over (revenue not profits) around £2m per year.
He told me, with a serious face, that he was looking for around £30m for the business.
I estimated that it’d take me around 75 years to get my money back from that particular deal.
Even when I managed to find a serious seller, the struggle continued.
Negotiating the price and terms and then financing and structuring the deal, was exhausting. 80% of these deals never ended up happening.
But they each took weeks of time and energy to play out.
Even when I managed to get a deal over the line, the pain continued.
Every small business has issues and skeletons in the closet that you simply didn’t know existed previously.
This could be anything from employee lawsuits brewing under the surface to management teams that were egotistical and impossible to work with.
The bottom line was that none of these businesses were ever truly ‘hands-off’. This sucked up more time and energy, and I realised that it was not a scalable way to grow.
But there was one positive from all this.
I developed a very clear framework for buying businesses.
A Brief Introduction to Deep-Value
Any business, in my opinion, is simply a cash machine, built by some people, to generate cash-flows, for as long as possible.
This cash can be used to buy nice things and live a comfortable life.
To build one of these cash-machines you need to gather some assets together. This is usually cash, initially, then things like equipment and buildings.
Once the machine is built, it then generates cash for its owners.
In theory, the value of the future cash-flows should far surpass the cost of building the machine in the first place.
Otherwise, what’s the point?
Therefore, a business is worth, roughly, the amount of cash it will generate during its remaining life.
When buying a business, your goal should be to pay a price below that value, so that you achieve some profit from the transaction.
For example, if the business will generate £1m during its remaining life, paying £1m for it is pointless.
You need to be paying less than £1m, so that the difference is your profit or ROI.
The less you pay, the more you make.
In this scenario, only two things really matter:
How long it will take to hit £1m from the businesses cash flow
How much less than the £1m you can get away with paying
Time is the biggest risk factor.
The longer you’re out of pocket, the higher the probability of something going wrong, and the drawdown becoming permanent.
So, the trick is to pay a price that you can get back (from the target business) as quickly as possible.
For small businesses, in the real-world, this usually means a multiple of profits somewhere between 2-4 x.
This allows you to get your money back in around 5 years, after factoring in fees, costs and financing, after which, all future profits are yours.
Bigger companies command larger multiples, because they have a better chance of living longer.
The name of the game is risk, and the key to risk is time.
Therefore, the quicker you get your money back from the acquired business, the lower the risk.
My desire to buy businesses was as strong as ever, but the process I was using was clearly unsustainable.
That’s when I stumbled into the world of deep-value investing.
My real-world experience taught me to ensure that I wouldn’t lose money on a deal. Deep-Value investing is the stock market version of that approach.
In fact, the pricing of some listed businesses is actually less than the tiny owner-managed businesses I was buying previously.
In some cases, you’d make your money back immediately, if you managed to purchase the entire company at the listed market cap price.
That means I regularly find businesses priced below their net-cash value.
For example:
I found one trading below net-cash with other assets worth more than 20x the market cap.
Another one was trading at net-cash, with the operating business being totally free.
Yet another was a world famous brand trading below the value of its cash, even though it was consistently profitable.
I have dozens of these opportunities available to me at any given time, and when I first started finding them, I couldn’t believe my eyes.
Not only were these infinitely higher quality businesses, but often, they were actually cheaper!
In short, deep-value investing is the art of buying a business for significantly less than its real-world value, as it is today.
It’s as simple as that.
There is no need for calculators or formulas or discounted cash flow models. The mispricing should be so obvious, it hits you immediately.
Why Deep-Value Works
If you’re just getting started with deep-value, you’re probably aware of why it works.
You’re buying real businesses, with real assets, that have real value in the real world.
Crucially, you’re paying significantly less than that real world value.
That creates an asymmetric dynamic. Asymmetry is where one half is completely different to the other half.
In the world of investing, an asymmetric opportunity is one where the upside dramatically outweighs the downside.
To put it simply, you have FAR more chance of making money than of losing money, when you buy a stock at steeply discounted prices.
This impact is multiplied when you buy a group of such stocks.
The group provides another layer of protection. It lets you take multiple opportunities at once, which further increases your odds of making money.
A Deep-Value Portfolio: Behind The Scenes
After reading all the books and watching all the podcasts, I had no doubt this approach worked.
My nagging doubts revolved around understanding exactly how it works, mainly so I could ensure I was doing it correctly.
To help with this, I’ll simply share my own experience from the top.
Starting with the initial portfolio.
There are several different ways to approach deep-value investing.
Some people prefer concentrated portfolios, while others prefer to hold many more stocks.
As a general rule, the more stocks you hold, the more ‘action’ you will get. Walter Schloss once stated that he bought and sold each stock in 4 years on average.
With 100 stocks in his portfolio, he would have been buying and selling something every two weeks, on average.
If you struggle with ‘doing nothing’ then a large portfolio might be your best bet. When you hold so many stocks, there is always something to do.
To generate better performance, a smaller portfolio, concentrated only on your top 10-20 ideas is my personal preference.
This requires a stronger temperament, and ability to sit still for long periods of time, but rewards you with better growth over time.
In all cases, the performance of a portfolio is consistent over the medium term but very lumpy over the short term.
For example, over two year periods, you’ll find the results quite satisfying.
Over three month periods, you’ll often find yourself wondering if you’re doing something wrong.
Individual stocks will fall dramatically, or the overall portfolio will lag your favourite index.
In fact, I’d say that you cannot really judge your performance fully until you have been managing a deep-value portfolio for at least five years.
This in itself, makes benchmarking and comparing yourself to other managers or indexes a self-defeating exercise.
When you lag in performance, for a sustained period of time, it can cause all sorts of psychological issues to emerge.
Instead of implementing your approach, you start thinking of ways to ‘beat the market’, which can lead to mistakes.
If you’re focused and dedicated, the outperformance will come later, as a consequence of you actively mastering a process over time.
My advice:
Focus on mastering your particular approach and ignore everything else.
Like an artist, with their headphones in, feverishly painting in their garage, with no regard to what’s going on ‘outside’.
A portfolio of cheap stocks is technically uncorrelated to the indexes, but at the same time, ebbs and flows alongside them.
If stocks are booming, you’ll feel that in the portfolio. If they’re tanking, you’ll feel that too, but to a lesser degree.
The outperformance comes from those random times when one of your stocks attracts a catalyst.
A buyout, or a turnaround, or a special dividend, and so on.
When a few stocks retreat, this transforms the performance of your portfolio into something much more satisfying.
These events don’t occur in any predictable fashion. Absolutely nothing may occur for months on end.
This is why the short-term performance is so ‘lumpy’.
When stocks reach your estimation of intrinsic value, it’s almost always best to cash out imo.
The stocks of mediocre businesses rarely continue flying high for long. Take your cash when the market is pricing in the best-case future outcome.
This next part may seem contradictory…
Sometimes, you’ll find something that technically isn’t ‘deep-value’ but that you have strong conviction in.
Allocate to these opportunities, even with small amounts at first. This will help you develop and expand to your full potential.
This game isn’t about being rigidly focused on buying businesses with low TBV ratios or only net-nets.
It’s about buying things for much less than they’re worth. Fixate on this principle instead of specific ratios or metrics.
When deciding how much to allocate to each stock, focus on how much you can lose rather than how much you can gain.
Allocate more to stocks that have almost zero downside risk.
Over time, these bets will generate significant returns on significant amounts of your capital.
Buying things because you hope they will go up is a recipe for disaster.
If you’re feeling down about the performance of your portfolio or a particular stock, zoom in for a while.
For example,
Go and re-read everything you can about the particular business behind your worst performing stock
Staring at the price for too long can make you start to believe the business must be worthless.
When you read about the business and look at its website and advertising campaigns and marketing content, very often, you’ll have a refreshed sense of a huge mispricing.
This keeps your spirits up and also strengthens your conviction in the idea.
I have regularly gone through these periods of doubting stocks, only to see them rerate 50%-200% within a few months of ‘zooming in’.
These days, I try to ignore the portfolio as much as possible and keep my mind occupied by other things in the short term.
There was one more thing I craved when I first started:
Case studies.
I wanted to deeply understand exactly what the most famous investors bought and sold and why, when they first started out.
I wanted to know what Buffett was buying in the 50’s to grow his capital so fast.
I wanted to know exactly what Schloss meant when he shrugged his shoulders and told an interviewer that he ‘just bought cheap stocks’.
Details, details, details.
These helped me really understand the process but also convince myself that I had the correct understanding.
If you felt the same you might find value in the regular case studies I post here.
To help with ideas that can be invested into right now, I post regular deep-value opportunities here.
I hope they help clarify everything in your mind, before you go all in.
The final topic I’ll touch on is ‘value traps’.
You’ll hear this a lot. If you talk to other people online, they will make you feel like everything you’re looking at is a value trap.
Don’t pay attention to these people. They are not business minded and have no idea what a real-world business looks like.
To help you understand what genuine value traps are (for deep-value investors), I wrote a couple of articles here and here.
These examples should help you understand the key differences.
Before we go further, it’s worth mentioning why I believe hardly anyone else implements deep-value.
I think it all comes down to temperament.
Sometimes, you need to suffer the indignity of looking wrong or buying things that everyone else is calling a value-trap.
Sometimes, you need to sit there while a few of your stocks tank and your whole years performance is dragged down.
Sometimes, the S&P 500 is just going up way more because the market is super bullish.
All of these things cause people to second guess themselves and change course.
This almost always leads to bad decisions and mistakes.
Most people don’t have the mentality to operate as deep-value investors.
And this, of course is fine.
This leaves more opportunities for those of us that thrive using the approach.
How To Get Started
I wanted to close this article with a few insights into how I’d advise my younger self about how to get started with the deep-value approach.
First, you need to genuinely love the game.
When you find a cheap, healthy business, it should feel like finding a £20 note in an old coat pocket.
Or like playing your favourite video game.
Without this type of feeling, you’re unlikely to be able to sustain it long enough to see results.
Next, you need to have a core idea for valuing a business.
Traditional ratios like P/E or P/B don’t really tell you the entire story.
For example, P/E ratios only tell you how the market cap of the business compares to last year's earnings.
If last year's earnings were anomalously high, or if the business has huge debts that far surpass the value of its cash, a low P/E may be misleading.
A low P/B ratio is worthless if the assets that the ‘book value’ is made up of are not tangible, and cannot be sold for cash in the real-world.
Always look at it as if you’re buying the whole business and will lose your house if the business fails to pay back the acquisition loan.
This will make you think more like a business owner.
My favourite metric to assess earnings is the 5Y FCF figure. This is the average FCF figure from the most recent 5 years.
This smooths out lumpy earnings but also lets you see immediately if earnings have been inflated by some weird one off event.
I then compare this 5Y FCF figure to the current enterprise value (EV).
I use EV, because it factors in debt.
If debts massively dwarf the cash, this will produce an EV that is much higher than market cap.
I consider EV the true, real-world, cost of buying a business.
Therefore, EV / 5Y FCF is a great valuation metric to look at, when deciding if a business is cheap or not.
I also like the Tangible-Book-Value Ratio (TBV).
This stripes out any asset that cannot be sold in the real-world and focuses on the liquidation value of the business.
If you can buy a business with a TBV ratio below 1, you’re basically getting all future profits for free.
This implies the business is dead and will never make money again.
All we need on these bets is for the business not to die, and the stock will rerate much higher as a result.
This is far simpler and more reliable than trying to forecast specific earnings over the next 15 years.
It creates a huge margin of safety, where only the absolute worst case scenario will put your investment at risk, and even then, you’re unlikely to lose much.
One of the great things about this business is that everyone does it slightly differently.
As long as you’re buying healthy businesses for less than they’re worth (one way or another) you’ll be fine.
Just focus on operating in a way that feels natural and gives you conviction. The rewards will come from sustained, long-term implementation.
Building your first portfolio will take weeks or even months.
My advice is just buy stocks as you find them and gradually build a portfolio over time. If you decide on a portfolio of 20 stocks, just allocate 5% to each one you find and hold the rest in cash.
Don’t fret about building a complete portfolio immediately.
This can be stressful and lead to unforced errors.
Once your portfolio is built, try not to check it too often. You’ll need to keep an eye on it to a degree, but don’t obsess.
A weekly or even monthly check in is generally fine, for the deep-value approach.
However, it’s always wise to constantly search for new ideas.
I run my portfolio as statistically as possible, but always ensure each individual business is healthy.
If one stock declines in intrinsic value, and I find another much better looking opportunity, I’ll cash the old one out and replace it with the new one.
Having said this, I avoid too much flipping.
If the thesis is still solid, just keep new ideas on a watchlist so you have stuff to recycle your capital back into, when you eventually do cash out.
A concentrated portfolio (up to 20 stocks) usually flips 1-2 stocks per quarter, on average. It’s normal to go several months without flipping anything.
Remember that returns are lumpy, rather than linear.
To give this article full utility, I have opened up the comments for everyone below.
Feel free to ask any nagging question you may have, and I’ll do my best to answer from my own experience.
Good luck.
Mr Deep-Value also offers:
Dirt-cheap access to Bloomberg’s No.1 competitor
Separately managed accounts for US clients
What do you do with a stock underperforming, due to the business deteriorating or stagnating. The classic value trap. What do the readings suggest?
Quintessential investing precepts🙏