I am very pleased to announce that my new book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover, 240 pages, Wiley Finance) is now available.
Deep Value is an exploration of the philosophy of deep value investment. It describes the evolution of the various theories of intrinsic value and activist investment from Benjamin Graham to Warren Buffett and Carl Icahn and beyond.
Filled with engaging anecdotes, penetrating statistical analysis and meticulous research, the book illustrates the principles and strategies of deep value investing and examines the counterintuitive idea behind its extraordinary performance.
About the book
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 offers a contradictory view.
Deep Value is an investigation of the evidence, and the conditions under which those losing stocks become asymmetric opportunities, with limited downside, and enormous upside. In pursuit of this idea, it canvases the academic and industry research into theories of intrinsic value, management’s influence on that value, and the impact of attempts to unseat management on both market price and value.
The value investment philosophy first described and practiced by Benjamin Graham in 1934 identified targets by their discount to liquidation value. That approach has proven extremely effective; however, those opportunities have all but disappeared from the modern stock market. To succeed, today’s deep value investors have adapted Graham’s philosophy, embracing its spirit while pushing beyond its confines. In Deep Value, I examine Graham’s 80-year-old intellectual legacy using modern statistical techniques to offer a penetrating and highly original perspective: That losing stocks offer unusually favorable investment prospects. The evidence reveals an axiomatic truth about investing: Investors aren’t rewarded for picking winners; they’re rewarded for uncovering mispricings.
And Deep Value shows the place to look for mispricings—in calamity, among the unloved, the ignored, the neglected, the shunned, and the feared.
Each chapter tells a different story about a characteristic of deep value investing, seeking to demonstrate a genuinely counterintuitive insight.Through these stories, it explores several ideas demonstrating that deeply undervalued stocks provide an enormous tail wind to investors, generating outsized returns whether they are subject to attention from private equity, strategic buyers, activist investors or not.
The book begins with former arbitrageur, and option trader Carl Icahn. An avowed Graham-and-Dodd investor, Icahn understood early the advantage of owning equities as apparently appetizing as poison. He took Benjamin Graham’s investment philosophy and used it to pursue deeply undervalued positions where he could supply his own catalyst, and control his own destiny.
As a portfolio, deeply undervalued companies with the conditions in place for activism or private equity attention offer asymmetric, market-beating returns. Modern activists exploit this property by taking large minority stakes in these stocks and then agitating for change. What better platform than a well-publicized proxy fight and tender offer to highlight mismanagement and underexploited intrinsic value? How better to induce either a voluntary restructuring or takeover by a bigger player in the same industry?
We’ll also see how activist investing can be understood as a form of arbitrage. Activists invest in poorly performing, undervalued firms with underexploited intrinsic value. By remedying the deficiency, or moving the company’s intrinsic value closer to its full potential, and eliminating the market price discount in the process, they capture a premium that represents both the improvement in the intrinsic value, and the removal of the market price discount. We scrutinize the returns to activism to determine the extent to which they are due to an improvement in intrinsic value, or simply the returns to picking deeply undervalued stocks.
Deep Value is also a practical guide that reveals little-known valuation metrics that activist investors, corporate raiders, private equity firms, and other contrarians use to identify attractive, asymmetric investment opportunities with limited downside and enormous upside—undervaluation, large cash holdings, and low payout ratios. These metrics favor companies with so-called lazy balance sheets and hidden or unfulfilled potential due to improper capitalization. Activists target these undervalued, cash-rich companies, seeking to improve the intrinsic value and close the market price discount by reducing excess cash through increased payout ratios. We analyze the returns to these metrics, and apply them to two recent, real world examples of activism. The power of these metrics is that they identify good candidates for activist attention, and if no activist emerges to improve the unexploited intrinsic value, other corrective forces act on the market price to generate excellent returns in the meantime.
What People Are Saying
I am incredibly excited about the calibre of endorsers for Deep Value, all of whom are extraordinarily talented practitioners:
Jim O’Shaughnessy, Chairman and Chief Executive Officer, O’Shaughnessy Asset Management, LLC, and author, What Works on Wall Street:
I highly recommend Deep Value. It takes a lively look at a variety of value investing strategies starting with the father of security analysis, Ben Graham. It outlines how individual investors can vastly outperform simple index strategies. For these value strategies to work, investors must be patient and brave, as it requires looking at stocks that the herd ignores. It will be a useful addition to any value investor’s library.
Joshua M. Brown, author, The Reformed Broker blog and the bestselling book Backstage Wall Street; star of CNBC’s The Halftime Report; Chief Executive Officer, Ritholtz Wealth Management:
Value investing is the most intuitive form of investing ever devised—the attempt to buy one dollar’s worth of assets for sixty cents. In his new book, Carlisle provides a thoroughly contemporary guide to the discipline, informed by killer anecdotes. Deep Value is part historical saga, part treasure map—a must-read for all investors.
Mebane Faber, Chief Investment Officer and Portfolio Manager, Cambria Investment Management, LLC, and author, The Ivy Portfolio:
Deep Value is a smart, modern take on classic Benjamin Graham-style value investment. It’s half history book and half quant stock screen guidebook. Learn both the history of value investing as well as a practical way to put it to work.
Vitaliy Katsenelson, Chief Investment Officer, Investment Management Associates, Inc., and author of The Little Book of Sideways Markets:
Deep Value is a refreshing, and highly entertaining work that makes a persuasive case for traditional value investment and a revival of Graham-style ‘ownership consciousness’. It is a compelling addition to the value investing canon.
Michael van Biema, Founder and Chief Investment Officer, van Biema Value Partners, and co-author, Value Investing: From Graham to Buffett and Beyond:
In Deep Value Carlisle provides a qualitative and quantitative view of why value investing has worked since the time of its conception. The book is a unique combination of careful description of the value styles and players, backed up by data that supports the conclusions reached. I strongly recommend this book to the value aficionado.
John L. Schwartz, MD, Chief Executive Officer and Co-Founder, The Value Investing Congress:
Carlisle has written an engaging history of the market, and its influence on the evolving theory of value investment. He has produced a valuable addition to any value investor’s library. I’m glad I read it.
John Mihaljevic, CFA, Managing Editor, The Manual of Ideas and author The Manual of Ideas:
Carlisle’s work succeeds on two levels: It is both a gripping account of some of the most notable episodes in the history of shareholder activism as well as an instructive guide to profiting from mean reversion and activist opportunities in today’s market. Highly recommended!
Christopher Cole, CFA, Founder and Managing Member, Artemis Capital Management, LLC:
From accounts of bold corporate raiders, behavioral psychology, to hard quantitative research, Deep Value leaves no stone unturned in a passionate exploration of what makes value investing and activism work.
Jacob L. Taylor and Lonnie J. Rush, Managing Partners of Farnam Street Investments and Visiting Professors at the UC Davis Graduate School of Management:
Carlisle weaves together a rich tapestry of multi-disciplinary academic research, investment theory, and historical anecdotes to produce the must-read investment book of 2014.
Wesley R. Gray, PhD, Executive Managing Member, Alpha Architect, and co-author, Quantitative Value:
Carlisle rigorously shows why value investing will continue to work. Deep Value is a MUST-READ for value investors.
Allen Benello, Chief Executive Officer, White River Partners, LP:
Carlisle has persuasively rendered a thought-provoking examination of a counterintuitive investment theory. The book is as engrossing as it is useful.
Henry Patner, Director of Research, HEG Capital:
Carlisle’s book provides a wonderful combination of entertaining case studies, synthesized with results from academic research and statistical backtesting, to arrive at sometimes surprising conclusions about what works in investing, and why.