The Manual of Ideas: The Proven Framework for Finding the Best Value Investments

CHAPTER 2

Deep Value: Ben Graham–Style Bargains

Inelegant but Profitable Strategy of Cigar Butt Investing

The problem is to distinguish between being contrary to a misguided consensus and merely being stubborn.

—Robert Arnott and Robert Lovell Jr.

“Welcome to the bargain bin of investing!” This alternative chapter title sums up Graham-style investing quite well. Ben Graham outlined his approach decades ago in Security Analysis, the investment classic he co-authored with fellow Columbia University professor David Dodd. Graham-style investing unabashedly starts with the price of a stock. Unless the price looks like a bargain based on some tangible metrics, Graham-style investors have no interest. The company in question could be the best business the world has ever seen, but the cheapskate segment of the investment community will give it no consideration. This discipline enables deep value investors to succeed where other investors dare not tread—in the underbelly of public equity markets.

Those of us who liked to dig through the bargain bins of CD stores—back when stores like the Virgin Megastore in Manhattan's Union Square still existed—may identify a few unique features of bargain bins. They tended to be somewhat hidden within the stores, certainly getting less attention than the latest top 10 selections. Instead of being arrayed on easy-to-browse shelves, the CDs were essentially tossed into a large bucket, putting the onus on the shopper to discern between the mediocre, the ...