The Challenges You May Face If You’re Always Looking For Deep-Valued Bargains

There are a group of investors who believe religiously in the teachings of Benjamin Graham – let’s call them the deep value investors.

They find the idea of only buying a company’s shares when it is trading at well below the business’s intrinsic value a very attractive proposition. They’re also by no means an obscure bunch of investors as some of the most well-known amongst their ranks includes legends in the business like Benjamin Graham (of course!), Walter Schloss, and Seth Klarman.

Here’s how they typically work. Let’s assume you’re a deep value investor and had estimated the intrinsic value of Keppel Land Ltd (SGX: K17) to be around S$4.50 per share, or 10% lower than its last reported net-asset value of S$4.95. In such an instance, you would only invest in Keppel Land if its share price was available at a deep discount (often 30% or more) to S$4.50.

In theory, this strategy sounds simple enough. But as a deep value investor in practice, there are some difficult challenges to overcome.

Firstly, the calculation of the share’s intrinsic value needs to be reasonably accurate. If you’re too optimistic (or too pessimistic) with your assumptions, you might up with an intrinsic value figure that’s far too high (or too low). In this case, you might end up investing in a company that is not worth investing in (or end up not investing in a company that’s worth investing in).

Second and more importantly, deep value investing can prove to be an extremely time-consuming activity. That’s because a deep value strategy would often mean that an investor would end up investing in companies that are of sub-par quality or facing severe risks (shares are unlikely to be available at a large discount if otherwise). When such shares hit their intrinsic values, deep value investors would have to sell and restart the search process all over again.

Deep value investors would thus need to have a deep bench of ideas that has to be constantly replenished. That’s not to mention that shares that are trading at a big discount to their intrinsic values are not always that easily found.

Foolish Summary

With all the above in mind, it might seem easier for an investor to find winning companies and sit on those shares for decades instead. But, you do not have to feel bad for the deep-value crowd. For most of them, the process of finding bargains in the market is a very exciting activity in and of itself. I should know, I am one of them.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in companies mentioned.