While we might all know that value investing is about the long game of buying undervalued stocks that are worth holding forever... what is deep value investing? Is it any different, and how so?
In this blog, I'm investigating just that: what deep value investing is, what a deep value investor looks like, and what the benefits of using this methodology are.
What is Deep Value Investing?
Deep value investing is, basically, value investing on steroids. This methodology (used by investors like Benjamin Graham and Warren Buffett) looks to buy stocks at a much greater discount to their intrinsic value than regular value investing does, meaning that both an investor's potential risk and potential reward rises.
Regular value investors are of the opinion that “Mr. Market” usually misjudges stock prices in the short-term. This can happen for any number of reasons, which we've delved into in previous blogs (read about how value investors value a business). This leads value investors to conduct their own fundamental analysis of businesses that they believe may be undervalued, finally being able to determine the intrinsic value of these undervalued stocks. If the market value is below their determined intrinsic value, it would be considered a buy for value investors.
Of course, not every investor will invest in every undervalued stock that they find. Each individual investor will have their own margin of safety that the market price needs to differ from their determined intrinsic value. The difference with deep value investing is that this margin of safety is far higher. Deep value investing looks for extremely discounted stocks. While this approach certainly means that the potential growth and yield of a stock is high, the risk of incorrectly analysing the stock's intrinsic value grows at the same time. Thus, deep value investing is really for investors who understand themselves and their strategies well, so that they fully trust their abilities and decisions.
Who is a Deep Value Investor?
Deep value investors are well-grounded, seasoned investors with long-term investing strategies.
In summary, deep value investors...
- Are cheapskates at heart. In a way, deep value investors are much like thrift-store shoppers - always after the discount, and at the highest discount possible.
- Don't focus on quarterly earnings, but look for opportunities of compounding wealth over the long-term.
- Have firm and high expectations of a determined undervalued stock. Their margin of safety is always quite high, although it can differ from investor to investor.
- Think in opportunities. A deep value investor's portfolio is usually tied up in potential growth and foresight, not market-chasing or quarterly earnings. They let the market come to them, instead of the other way around.
- Are after high growth potential, as their higher risk factor means they expect higher returns.
Deep value investing has a better track record than any other approach I've come across. This makes it the perfect investment strategy for investors who want outstanding portfolio results, but are willing to be patient in seeing them.
STRIDE is the perfect tool for investors wanting to explore deep value principles some more. If you'd like to know more about how STRIDE could help you discover deep value, schedule your free live demo below.