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

Preface

“The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.”

—Adam Smith, The Wealth of Nations (1776)

Deep value is investment triumph disguised as business disaster. It is a simple, but counterintuitive idea: Under the right conditions, losing stocks—those in crisis, with apparently failing businesses, and uncertain futures—offer unusually favorable investment prospects. This is a philosophy that runs counter to the received wisdom of the market. Many investors believe that a good business and a good investment are the same thing. Many value investors, inspired by Warren Buffett’s example, believe that a good, undervalued business is the best investment. The research seems to offer a contradictory view. Though they appear intensely unappealing—perhaps because they appear so intensely unappealing—deeply undervalued companies offer very attractive returns. Often found in calamity, they have tanking market prices, receding earnings, and the equity looks like poison. At the extreme, they might be losing money and headed for liquidation. That’s why they’re cheap. As Benjamin Graham noted in Security Analysis, “If the profits had been increasing steadily it is obvious that the shares would not sell at so low a price. The objection to buying ...