For Deep Value Investing, Forget About Price

by Tim Melvin | August 7, 2013 1:21 pm

When I write about the deep value investing[1] — and the fact that it fits my lifestyle and personality — I always get someone who accuses me of taking the lazy way out.

I wish such an accusation was accurate. If there was a lazy way to achieve superior long-term returns, I would be its leading advocate and practitioner.

Instead, finding stocks that are cheap on an asset basis and have an adequate margin of safety is not an easy pursuit. Reports have to read and analyzed on a regular basis, all while screens and searches are done daily. Asset values have to be vetted and checked by running comparable valuations on property and buildings and other holdings verified.

To sum it up, the learning curve for asset-based investing is steep.

My advantage comes from being able to do the work when and where I choose. I do not have to be sitting in front of my screen or connected to constant flow of prices and news. I have read more than one 10K with the baseball game on in the background and when 13F season hits next week I will be reading those filings by the pool in the evening.

Once I have done the work to verify the value of the stock and purchased the shares, I don’t spend a lot of time day-to-day worrying about the price until it approaches full value.

As an example, I currently own several insurance companies and banks that were purchased at huge discounts to book value. Hartford Financial Services (HIG[2]) has completely transformed itself by disposing of non-core asset and focusing on the property and casualty insurance business.

The stock trades at just 80% of tangible book value right now and at about half of my estimate of intrinsic value. I feel no need to check the stock price several times a day or worry about short-term developments. I have a high degree of faith in my valuation of the company and am not going to sell based on short-term price moves.

On top of that, as I am driving through the everglades to the Keys this week with my wife and daughter, I will not check on the price of Northeast Bancorp (NBN[3]) anytime during the trip. I may read some recent 10Qs on the beach during the day, but the price of a cheap well-run bank in Lewiston, Maine, is not going to be high on my list of concerns.

The bank trades below book value and has plenty of capital, all while non-performing loans are at just 1% of the total. I have no intention of selling the stock anytime soon and, if the market were to drop, I would be inclined to buy a little more.

Deep value investing is concerned about price only as it relates to the value of the underlying business. Day-to-day price fluctuations are just noise most of the time and can be ignored — and preferably ignored from the beach or bleachers after reading the latest filings.

As of this writing, Tim Melvin was long HIG and NBN.

  1. deep value investing:
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