We are all taught and innately understand that in order to generate high investment returns, we probably need to take high risks.
Mr Bos asserts that successful deep value investing is not just about buying cheap companies. Understanding the nature of the assets on the balance sheet is critical.
More particularly, Mr Bos is interested in a company’s current assets as they are liquid and therefore can be sold off more easily than fixed assets. If he can find a stock whose current assets, less total liabilities, are worth more than the current share price, then it is potentially very interesting – and certainly a bargain. This is the foundation of Mr Bos’ investment approach and he systematically takes the reader through carefully laid out examples of both successful and unsuccessful investments. Each chapter incorporates a company description, an investment case and an outcome.
Simple balance sheet analysis is included, as is his determination of the all-important margin of safety. Numerous lessons are highlighted throughout, such as: be wary of debt (particularly in the form of overdrafts); be aware that goodwill and intangibles are unreliable assets; understand a firm’s clients and ascertain their ability to pay.
While much of his value analysis is fact-based, evaluating the downside risks in the context of a firm’s future is tricky and he pays careful attention to published forward-looking statements in his efforts to avoid value traps. For his successful holdings, value is often realised when they are acquired, while others sell off undervalued assets or are taken private. RAB Capital was an unsuccessful holding and the story of its demise holds uncomfortable lessons for those involved in running asset management businesses, including the perils of key personnel risk and the challenges of running investment funds while also being a quoted business.
Mr Bos has written a practical and very readable book that should appeal to those who are looking to learn more about this very particular style of investing. The examples are neatly interwoven with the lessons he has learnt over the years and the qualities required of a deep value investor.
Discipline, patience and the ability to stand apart from the crowd are not characteristics bestowed upon all of us mere mortals.
Gill Hutchison is head of investment research at City Financial