Deep value investing is what the world’s most successful value investor Warren Buffet learned from his mentor. He applied this investing strategy which helped him to compound his investment over 29% between 1957 and 1969. After that, he changed his style and started investing in large businesses.
However, you cannot ignore the fact that Buffett got the highest returns when he had less capital with deep value investing. So, what is deep value investing? If you are not aware of this investing strategy, you will learn the ins and outs of deep value investing and how to beat the market in this article.
Deep Value Investing
Deep value investing is a technique of choosing undervalued stocks instead of focusing on future growth and big returns. If you have limited capital, you should look for the following things while planning for deep value investing.
Companies Which Trade Below NCAV
As you know that deep value investing uses the techniques of investing in undervalued stocks, it requires extensive research for stock valuation. You need to figure out which companies are deeply undervalued.
Investing in those undervalued stocks gives you a better market price with lower risk and sizeable return. Moreover, some companies also trade below their Net Current Asset Value, which is a great option for deep value investing.
Every Investment May Not Be Superior
Remember, deep-value companies sometimes don’t give you high returns. One of the common reasons is their fail business model. However, that’s ok because you are not much concerned about the future growth and wide economic factors of the company.
In deep value investing, you’re more concerned about the stock evaluation. So, there is less risk and stable growth. But you shouldn’t choose crappy companies that might be obsolete shortly.
For example, photo filming printing companies are continually going down because of digital photography. So, it’s better to keep away from such companies even though their share value is very cheap.
Invest in Low Debt Companies
Another important thing to note about deep value companies is to choose those stocks which have low debt. It’s always advisable to avoid companies that have high debt. Such companies are struggling to survive and are never safe to invest in.
Apart from the low debt and poot business model, you should also consider the management team. As a deep value investor, you’re partly the owner of the company. So, you need to ensure that the company is working in your best interests.
Before choosing a deep value company, you need to also evaluate the management team. A company that has the most talented people doesn’t mean that it will bring the best result. You should choose a company in which the management team aligns with your best interest.
Spread Your Risk
As always, diversification is the key to mitigate investment risks. Perhaps, the deep value companies you choose are going through a tough time. This is the reason the company price may be undervalued. So, you shouldn’t stick to only a few deep-value companies.
You should spread out your risk in a number of deep-value companies. Since the market is uncertain, you can never predict what could happen to a company due to uncertainty. Even though a particular company doesn’t perform well or the value goes down, a small percentage of your portfolio goes down.
However, you shouldn’t go too broad because it can reduce your growth. Also, diversifying too much can make the investing process more and more complicated.
Don’t Expect Early
Last but not least, deep-value investing requires patience. Remember, when you invest in a deep-value company, don’t expect that they will give a high return early. Patience is the key when you’re investing in deep-value companies.
The stock price will ultimately increase and give you a high return. But you need to wait until it goes up. After that, you can exit and look for new deep-value companies. So, you need to wait until the company grows.
However, you should know when to move out of the company. With your research skills and expertise, you can learn how much a company can grow.
Hopefully, the above information has helped you to understand the deep value investing strategy. Remember, you need to have patience, and expecting early returns is not going to help you. Please share your thoughts on this post in the comments section.