Discount Investing involves buying shares at a substantial discount to their underlying net asset value
With the aim of selling after the discount has narrowed. Our focus is on investments where the value of the underlying assets can be easily estimated with a reasonable degree of accuracy. We look for companies that have good quality assets, a solid balance sheet and honest management. Our main area of focus is conglomerates and holding companies; particularly, where a high proportion of the assets are either cash, quoted shares or property, which has been marked to market. When analysing companies we give equal weight to the balance sheet and cashflow statement, rather than focusing just on earnings.
Our investment philosophy is not particularly new or radical. In essence, it is classic value investing: buying at a sufficiently high discount to intrinsic value to provide the necessary margin of safety. The key of advantage of buying at a wide discount is that it provides an asymmetric bet—the discount is far more likely to narrow than it is to widen. To a large degree, this is a normal process of mean reversion resulting from the constant ebb and flow of market sentiment. However, we also consider what other factors may lead the discount to narrow, or widen, including the possibility of some form of corporate action, such as an equity issue or M&A.
“We now believe that the most attractive value investments are in the common stocks of extremely well financed companies, which sell at material discounts from readily ascertainable net asset values.”
—Martin J. Whitman, Martin Shubik, The Aggressive Conservative Investor