12 Things That Will Get Any Value Investor Excited

Today, we talk about what are the 12 things that will get any value investor excited.

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This article is specifically for us – the hardcore value investors.

Those who get excited about the things most others completely dismiss.

If you hear another person talking about these things and you love value investing, you’re likely to get excited and want to talk to that person.

But as value investors, we don’t show emotion much… We don’t get excited.

So to become good at what we do, we must train ourselves out of much of this kind of emotion… But that doesn’t mean we’re not human.

If you mention any of the following 12 things to any value investor around the world, you’re likely not to only get their attention. But maybe you will make a best friend like the scene from the movie Step Brothers seen below.

You may have one of those kinds of moments from the scene above if you hear someone else talking about any of the following 12 things… Especially #1.

12. High Margins

If you’re looking at company’s and it has high margins, you’re likely to pique value investors interest… And you’re likely to get excited.

Why?

Frankly, because it’s important.

Because, we want great businesses to produce a lot of cashflow, to have high ROICs, and to have high operating margins.

If you say something like – this company I’m researching has an operating margin on average over the last 10 years of 25%… We’re going to get excited.

11. Healthy Balance Sheet

The number one rule of value investing is not to lose money.

So we do this first by looking at balance sheets to ensure the company doesn’t have a lot of debt in relation to cash.

Generally, we also don’t want a lot of goodwill and intangible assets on the balance sheets because many times these aren’t useful.

So, if you’re talking about balance sheet strength and a company that has a lot of cash compared to debt, you’re going to get any value investor excited.

If the company also has valuable assets on its balance sheet like investment float… Even better.

10. Reading

This is top top 10 of the things that will get any value investor excited.

Value investors love to read. A lot.

We must slog through sometimes hundreds of companies and hundreds or thousands of pages worth of financial reports and statements just to find one good potential investment.

We also read value investing books, finance books, historical biographies etc.

We want to learn from others mistakes so we can avoid making them ourselves.

And we love reading through financial statements to ensure we have a margin of safety… Or at least that there are no major red flags before investing.

If you want to get a value investor excited, tell them about the last nonfiction book or company annual report you read.

9. Learning.

This goes with reading above…

Because we must learn constantly to get better at what we do.

Why?  Because there’s always more to learn… Always ways to improve… Always another company to research… Always another industry to analyze… Always another concept to learn.

Warren Buffets still in his 80’s says he reads 500 pages a day.

Many of us now prefer to watch YouTube videos, listen to podcasts, or audio books.

Therefore, if you’re constantly learning and know what an autodidact is – you may be a value investor.

8. Free Cash Flow

We want our companies to have healthy balance sheets as a first step in our ever-growing list of things to check for margin of safety.

But we also want our companies to produce large amounts of free cash flow.

If they do, not only does this give us a larger margin of safety because they likely have a strong balance sheet… But it also allows the company to have cash to invest in other assets or to grow their companies.

Large and regular cash flow production also means the company likely has little to no debt. That their margins are high.  And that the value of the businesses should grow over time.

So if you mention a company or investment that produces large amounts of free cash flow – look around to see if you can spot a value investor who overheard, you and wants to know more.

7. Thinking

All this reading, all this learning, all the convoluted wording in financial statements… These all require time to think about and analyze because they’re mentally demanding.

So, if we’re to make a smart and logical investment decision, we need time to think about and synthesize all the information we’re learning from.

If you love to think things through and come to logical decisions… Chances are you’d like value investing.  It’s one never ending cycle of learning and thinking.

6. Quiet

This is top 6 of the things that will get any value investor excited.

We love quiet because we require thinking… Because we read a lot… And because we learn a lot.

Most of us either have or want a quiet space when working we can go to like a library or office.

Our work requires a lot of mental bandwidth and requires extreme focus and concentration for long periods of time.

Especially those of us that have kids… We learn to LOVE and savor the quiet time we get so we can read, learn, think, and analyze.

5. Looking Through Exotic Information

When we’re researching a potential investment, we like to think that we’re on a bit of a treasure hunt…

That we’re seeing information that hardly anybody anyone else in the world knows about.

That we know about these investments than many of the people even running the company.

Not necessarily in a fictional sense, but that we’re literally digging for treasure as we read every word in a 100+ page annual or proxy report.

That we’ve worked through convoluted, complex, and sometimes incomprehensible information to find one nugget that makes it worth it.

That we’re researching a random $40 million company from across the world that’s listed on the OTC market… And we’re the only one to find this company and research them.

Typically, the more exotic the information we can find the better… Because this means fewer people have looked at it.

We can then use this information to gain a legal advantage over others because we’re willing to put in the work when others aren’t… This allows us to earn higher investment returns than average investors.

4.  If You Mention Any Of The Following People

To start. here is the list:

• Warren Buffett
• Charlie Munger
• Seth Klarman
• Joel Greenblatt
• Bruce Greenwald
• Benjamin Graham
• Shelby Davis
• Henry Singleton
• Tom Murphy

Saying any of the names above is like a Siren’s call to us… If you say any of the names above, we’re likely going to come up to you and try to talk.

Not only are we likely to have a ton in common if you know these names.

But there’s a great chance we’re about to have the moment from Step Brothers above.

Other than Warren Buffett above, knowledge of most of the other names means you’re probably a finance and value investing nerd like us.

We work by ourselves, often in quiet, but if you mention any of the names above… Beware.

We’re about to ask you a million questions and talk your ear off.

So, if you mention these names we’re going to come over and talk to you – no matter how shy, reserved, or introverted we are… It’s as simple as that.

3. Competitive Advantages

So, if you’re talking about economies of scale, network effects, moats, competitive advantages in business, or anything like this – we’re going to try to talk to you.

Even many value investors and finance professionals don’t talk about these things in any depth.

Finding competitive advantages that are sustained over the long term is rare for any size of investment… But especially for tiny companies under $500 million in market cap.

If you can talk about how you found Company A and its margins are 10 percentage points higher than its competitors due to its competitive advantages… We’re going to talk to you.

Oh and we’ll be talking about competitive advantages for the next several hours, days, weeks, months, etc

2. Undervalued Assets

If you’re sitting behind a computer and someone mentions the term – undervalued or undervalued asset or undervalued investment… We’re going to peak our heads away from our books and computers to see what you’ve found.

Undervalued assets and investments are one of the main things value investors look for… Arguably for many of us they’re the number 1 thing we’re seeking.

And with valuations still at or near all time highs, and the market rising straight up for most of the last 11 years, if you mention you’ve found something that’s undervalued… We’re going to get extremely excited.

Not much gets a value investor more excited – especially during this long drought of overvalued companies – than finding something that’s undervalued.

1. Finding Hidden Treasure

The top 1 of the 12 things that will get any value investor excited…

This goes with #5 above but instead of looking through exotic information – this is when we actually find the hidden treasure underneath the red X we’ve been looking for months for.

I’m going to tell you a story to illustrate this point… This is how amazing it is to find buried treasure when you’re a value investor.

Six or seven years ago I this vividly to this day.

I was working in an office at an investment newsletter in Delray Beach Florida… All the investment analysts were in one corner of the building.  And we all normally wore noise-canceling headphones so we could concentrate on our work in the open office.

When we were all in our flow of reading, writing, and analyzing at our computer screens we didn’t talk much… And we didn’t hear much because of our headphones.

All the sudden, I heard 2 of my colleagues talking about some specific metrics I use to find great businesses.

This was like hearing the word sex when you were a teenager…

No matter what you’re doing this catches your attention and you begin listening.

I heard this even through my noise-canceling headphones I had on and the music I was listening to.

At this point, I creepily take my headphones off, and peek my face over my computer screen.

He was talking about a sub $1 billion company with massive margins… This got me even more excited because my specialty is smaller companies.

Somehow this company made it through the stock screener he was using… And he was talking about this companies’ spectacular metrics.

Then I hear something that truly aroused my attention…

He says this company has a lot of net operating loss carryforwards (NOL’s) compared to its size.

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A brief break in the story here for context…

NO ONE talks about these. When I say no one… I mean this almost quite literally.

I’ve studied value investing for 13 years now and I can count on one hand the number of times I’ve heard someone talk about net operating loss carryforwards when I didn’t bring them up first.

These can be the buried treasure we’ve searched for in hundreds of pages of financial docs.

NOL’s are tax credits companies “earn” when they are unprofitable… But if a company is unprofitable for a long time, they can accrue a large amount of these and use them to offset future years tax burdens.

For example

If a company is unprofitable for 5 years and has negative net income of $10 million each year for a total of $50 million.  The company will earn $50 million in tax credits.

If the company, then becomes profitable in year 6 through year 10 and earns $10 million per year in positive net income… The company could use these credits to not have to pay taxes for those 5 profitable years.

At current tax rates in the US, this is like increasing profits by 25% to 35% in each of the years the company is profitable because it wouldn’t have to pay taxes in those years due to the use of these NOLs.

I’ve seen companies that became profitable that had $500 million worth of these – and they had market caps under $1 billion… These can be extremely valuable assets that almost no one knows about.

Not only do most people not know about these and what they are… But they’re usually only talked about in a line or two in a company’s annual report… And the company almost never explicitly says what these are and can be used for.

These are the epitome of hidden treasure…

It takes time to know what they are, how they are used, how they’re valuable, and almost no one knows what they are or even where to find them in financial statements.

For more info on these valuable hidden assets you can check out this post here.

Before anything else, let me calm down and get back to the story.

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Back to the story

This got me out of my chair, and I walked over into their conversation.

Turns out this company was right up my alley…

It was a sub $1 billion company with high margins, competitive advantages, and a bunch of net operating loss carryforwards.

If you talk about NOL’s, net deferred tax assets – this is another term for NOL’s, tax credits, real estate the company owns that is fully depreciated off the balance sheet… Uhh.

These are the proverbial hidden treasures deep value investors like us are looking for… And rarely find.

These kinds of things help you gain a legal informational advantage over other investors… Typically, only the nerdiest of value investing and finance nerds even know what they are.

These can be legitimate and rare hidden treasures if you find them in any investment.

These are so rare that we will sometimes go months or years without finding these kinds of things.

And once we do, we turn into teenagers who hear the word sex…

We’re likely to be giddy, have a goofy look on our face, and talk in whispers like we’re talking about something we shouldn’t be talking about.

Finding these is like catching a big fish while fishing…

Like scoring a touchdown in football…

Like scoring a goal in soccer…

Hitting the perfect shot in golf…

Scoring the winning basket in basketball.

Or hitting a home run in baseball.

If you’re talking about these kinds of things – as a deep value investor not only will we get super excited… But we may try to kidnap you into becoming our best friend.

Only half joking.

You get super excited because not only has all your hard work paid off… But you’ve also done something rare… And hardly anyone knows what you now know.

Conclusion

In conclusion, if you’re a value investor, you’ve probably gotten a bit excited just reading the above.

And if you know a finance and value investor nerd you should share this with them… They’ll probably get a kick out of this list too.

Because of that, as value investors we train ourselves to leave most emotion behind… Or maybe this is just how many of us are wired… But this doesn’t mean we don’t like to laugh and have fun.

I hope you found this entertaining.

Your thoughts

So, what is your favorite thing above? Do you have something you love that I missed? Do you have a nerdy story like mine above about getting excited about hearing talk of high margins and NOL’s?

Let me know in the comments below.

P.S. Another Masterclass student signed up and we started our live training and Q&A sessions last week. If you want to become a better value investor fast, make sure to check out our Value Investing Journey Masterclass. The special offer, available to only 6 more people, is five (5) FREE one on one training sessions with me. Plus you’ll get more than $2000 in value, courses, and other resources just for signing up to the Masterclass.