Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations

Chapter 7Catch a Falling KnifeThe Anatomy of a Contrarian Value Strategy

“There is no a priori probability about it. A strange enigma is man!”

“Someone calls him a soul concealed in an animal, “I suggested.

“Winwood Reade is good upon the subject,” said Holmes. “He remarks that, while the individual man is an insoluble puzzle, in the aggregate he becomes a mathematical certainty. You can, for example, never foretell what any one man will do, but you can say with precision what an average number will be up to. Individuals vary, but percentages remain constant. So says the statistician.”

— Arthur Conan Doyle, The Sign of Four (1890)

Ronald Alfred Brierley launched New Zealand Stocks and Shares—“The Leading Investment Journal,” as it described itself—in 1956 at the age of 19.¹ He had decided to run a tiny classified advertisement selling the newsletter. If no one subscribed he’d abandon the project and be out of pocket only the cost of the advertisement. At the time the market capitalization of the entire New Zealand stock market was just NZ£300 million²—about $12 billion in 2014 U.S. dollars³—and the newspaper relegated financial news to a half page squashed between the golf and horse racing results, so he can’t have expected much of a response. To his delight, five checks for NZ£1 10s came in, for a grand total of NZ£7 10s (about $400), which was enough to produce the first edition. Brierley authored every one of its six pages of “expert reports,” folding and stuffing the finished ...