Investor Tobias Carlisle says deep value investing can offer “asymmetric returns with limited downside and greater upside,” but represents a counter-intuitive approach. This according to a recent article in The Economic Times.
Carlisle, CIO at Acquirers Funds and author of the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Companies, argues that investors looking to beat the market must think beyond the usual tactic of “buying only undervalued stocks and waiting for the reversion to the mean.” The article cites Carlisle’s comments from a presentation at Talks@Google: “The key to maximizing returns is to maximize our chances at mean reversion. That means maximizing the margin of safety. We want the most undervalued stocks. And we want to make sure they survive to mean revert.”
To ensure solid returns over the long-term, Carlisle offers the following 7 deep-value investing principles:
- Zig when the crowd zags: Investors should avoid following the herd. Attractive investment opportunities, he says, emerge only when the crowd wants to sell.
- Find a margin of safety: Deep-value stocks are undervalued because the possibility of a worst-case scenario is already priced in—offering a high upside/low downside bet.
- Focus on cash flows: Carlisle advises investors to focus on a company’s cash generating potential instead of only on profits. “The crowd ignores cash,” he says, focusing on “the eggs rather than the golden goose. A seemingly poor business with a strong balance sheet could represent hidden value.”
- Be cautious of fast-growing companies: Profitable and rapidly growing companies attract competition, says Carlisle, which leads to erosion of margins and profits. Instead, he encourages investors to look at companies facing difficulties—and that have prices that reflect that fact.
- Follow simple, concrete rules to avoid errors: Carlisle advocates for simple rules that can be back tested to avoid major errors. “No strategy has ever failed in theory,” he says, adding that “Almost all have failed in reality.”
- Avoid a concentrated portfolio: Focusing on a few high-performing stocks leads to higher volatility and could trigger poor decision-making when the market takes a dip.
- Have patience for long-term success: Patient investors can find opportunities if they are “willing to put up with below-average results in the short-term.”