Bos, Deep Value Investing

Jeroen Bos, portfolio manager of the UK-regulated Deep Value Investments Fund, has updated his 2013 book Deep Value Investing: Finding Bargain Shares with Big Potential in this second edition (Harriman House, 2018).

His guiding principle in finding bargain stocks is to look for companies whose current assets minus both current liabilities and long-term liabilities are greater than the current market capitalization. He leaves fixed assets out of the equation altogether since they are relatively illiquid. As a result, his favorite value stocks are “those that are light on fixed assets and heavy on current assets. And these tend to be service companies—for example, recruitment firms, financial services, consultants, housebuilders (from time to time) and so on.”

Since the deep value investor focuses on assets rather than earnings, he looks to buy stock in companies just when the majority of investors are selling. That is, “cyclical stocks always look cheapest on an earnings basis (i.e. measured by their P/E level) at the top of their cycle and most expensive at the bottom of the cycle, when their P/E levels are sky-high as their earnings have collapsed. … The outlook in the short term may indeed be terrible, but the nature of such service companies is that their business models tend to be pretty flexible. They are able to contract their operations before they really hit trouble, unlike (for example) manufacturers, who have far less flexibility: vast workforces, factories, supply chains etc.”

Bos enters a trade based on deep value but exits “into an earnings-driven market.” He doesn’t sell when a stock hits its net asset value but waits for earnings to re-establish themselves. As Bos writes, “Great deep value stocks are hard enough to find in the first place, and I am certainly not in the mood to let them go just when it starts to get interesting.” It’s not at all uncommon for deep value stocks to return 100% or 200%.

After spelling out his investment philosophy, Bos devotes the rest of the book to analyzing individual investments—one stock per chapter. These are British stocks, but the principles are of course applicable to other markets as well.

In the epilogue Bos summarizes his approach to deep value investing. “It is often said that this kind of equity investing must be quite risky. Unsurprisingly, I disagree! The companies may look distressed and be down in the doldrums. But we are largely purchasing liquid assets at a discount. It’s like paying £20 for a £50 note. If these deep value stocks drop further after we’ve bought them, it usually means a chance to simply buy more for less--£50 for £10 or £5. The long term is what matters. And quality will out: either other investors will notice, or other companies will swoop in for a buyout.”