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

Chapter 10Applied Deep ValueHow to Identify Deeply Undervalued, Potential Activist Targets

Mr. Graham: “Management is one of the most important factors in the evaluation of a leading company and it has a great effect upon the market price of secondary companies. It does not necessarily control the value of the secondary companies for the long pull because if the management is comparatively poor there are forces at work which tend to improve the management and thereby improve the value of the company.”

The Chairman: “When you go into special situations and buy large blocks, do you usually try to get control of the company?”

Mr. Graham: “No; that is very exceptional. I would say out of about 400 companies that we may have invested in in the last few years, there would not be more than 3 or 4 in which we would have had any interest in acquiring control.”

—Benjamin Graham, Stock Market Study. Hearings Before The Committee on Banking and Currency, United States Senate, Eighty-Fourth Congress, First Session on Factors Affecting the Buying and Selling of Equity Securities. (March 3, 1955)¹

Happy families are all alike; every unhappy family is unhappy in its own way.

— Leo Tolstoy, Anna Karenina (1877)

Like Tolstoy’s happy families, Buffett’s “wonderful companies” represent an ideal from which any deficiency creates a less-than-optimal intrinsic valuation, with a market price that is usually further depressed from that suboptimal value. Activist investors seek these unhappy families—“unwonderful” ...