Deep Value in Practice: Screening, Margin of Safety and Holding Discipline
A practical guide to screening, valuation shortcuts, margin of safety and portfolio construction for value investors.
Introduction
(Article ~700-900 words follows — practical sections on screening, intrinsic value, margin of safety, portfolio sizing, monitoring, pitfalls and exit rules.)
Screening and idea generation Use quantitative filters: low P/E vs sector, low EV/EBITDA, depressed cash conversion and improving ROIC trends. Combine with qualitative checks: durable franchises, capital allocation history and management incentives.
Estimating intrinsic value Prefer simple FCF-backed approaches for steady businesses. Build a 3-case model (base, conservative, optimistic) and document assumptions; where cash flows are noisy, use asset-backed or liquidation floors.
Margin of safety and sizing Apply a margin of safety (20–40% depending on uncertainty). Size positions based on conviction and liquidity — highest conviction positions get modestly larger weights, but avoid concentration risk.
Monitoring and triggers Focus on business fundamentals, not daily price action. Monitor revenue/margin stability, cash conversion and management actions. Have clear exit triggers (deterioration of fundamentals, full valuation realization or better opportunities).
Common traps Avoid value traps (structural decline, poor governance) and over-leveraging. Be humble — wrong assumptions can persist for long periods.
Conclusion Deep value is disciplined work: rigorous screening, conservative valuation, explicit margins of safety and an unemotional holding discipline.
