article , video 12-29-2014

What is a Deep Value Investor?

Deep value investors have a long-term focus and are not fixated on quarterly earnings. They're looking for companies with the ability to compound wealth over time.

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"I'm a small-cap equity specialist and a generalist. I cover just about every industry. Deep value investors tend to be cheapskates. We're trying to buy things inexpensively. The old adage about what deep value investors do is we're trying to buy a dollar for 50 cents."

"I think the opportunities in deep value arise from the focus that most people have, which is on quarterly earnings. A lot of the irrational things that people do in the stock market arise from the fact that they don't really know what they own. So they look at the stock price as some kind of signal that they're doing the right thing or they're doing something wrong. You get reinforcement from the idea that you've done a good thing if the stock is going up and you've done something bad if the stock is going down.

"In very general terms, there are two types of investments that I make. One is the cheap stock; it's a value stock. It has problems; the price has been knocked down. We perceive those problems as temporary. We're looking for a discount to book value, we're looking at a discount to asset value, we're looking for survivability, and we see a path out of their problems.

"The other type of investment that we like to make—and it's where we put more money to work—is in situations where you have companies that are holding companies, or investment holding companies or conglomerates, run by very talented people, very good capital allocators. Everybody knows about Berkshire Hathaway and Leucadia National. Those are the two sort of archetypal examples of this. But there are smaller holding companies that are really run in the same way and are run by people who are good investors—they're value investors—and we've actually had great success with them over the years.

"With deep value investing, it is perceived as being a little bit riskier than just going along with the crowd and buying what's popular. But like everybody else, our goals are the same. We want the same things that everybody else wants. We want to put in an order, and buy a stock, and make an investment, and get capital appreciation and capital growth. We want to put together a portfolio of winners.

"How we go about it is a little bit different. We're not fixated on quarterly earnings. We're not looking for the company to beat the numbers next quarter. We're looking for an opportunity that may take three to five years to work out.

"There is a focus that the market has that success is measured by reported earnings. And when you get into the sort of deeper value side of things, you see that wealth can be created and success can be measured through growth and intrinsic value, growth and asset value, growth in book value."

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Investments in securities of small-cap companies may involve considerably more risk than investments in securities of larger-cap companies. (See "Primary Risks for Fund Investors" in the prospectus.)

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