Value investing means different things to different people. For some, a company with a low price to earnings ratio (P/E) or a low price to book ratio (P/B) is indicative of value. For others, it’s about being contrarian and disagreeing with the market. These are certainly not bad strategies and one can often find value lurking in low P/E or low P/B stocks. Being a contrarian and investing in companies that have suffered large price declines can also work out well.
Low valuation multiples or taking a contrary view of a stock is just one part of the puzzle. A company’s value could be hidden so that it appears to have a high multiple. A good example of this is a bank. A good bank is one that grows its deposits as cheaply as possible to lend it out at a higher rate. In a low interest rate environment, it’s true earning power is hidden because it can’t lend the money out at high enough rates.
A bank that has steadily grown its deposits and doesn’t pay a lot of interest (i.e. a large portion of its deposits are non-interest bearing) is an example of hidden value. If interest rates rise, such a bank will earn more. This is analogous a large rock at the top of a mountain. Since it just sits around doing nothing most of the time, its true potential is hidden. However, a small push over the edge quickly transforms that potential energy into kinetic energy and the rock suddenly looks more interesting.
Value investing is figuring out a conservative estimate of a company’s intrinsic value and paying less for it, that is it. These can be mega caps, small caps, foreign stocks, arbitrage opportunities, spin-offs etc. Value investing is market cap agnostic but most good bargains can be found in the smaller cap universe because they are under researched and illiquid.
This website is focused on finding value stocks across the spectrum but the bias will naturally bend towards smaller caps.
Sherlock Holmes was a great investigator and would probably have been a great investor as well. Pattern recognition, being rational and asking the right questions are equally important skills in an investigator and an investor. This blog is named after Sherlock Holmes because being a good investor largely depends on the quality of your investigative work.
I currently work as an analyst at an investment firm in the UK. I enjoy analyzing misunderstood companies and the purpose of this website is to share my ideas about undervalued stocks in developed markets.
I have recently become interested in using natural language processing to analyse shareholder letters to spot good management and capital allocators. I Use Python and R for this.
You can contact me at firstname.lastname@example.org