Everybody Writes the Same Thesis About Companies Below Tangible Book. It Leaves Out the Only Thing That Matters.

Most companies below tangible book will never hand you anything. These seven will, and for four completely different reasons.

It is a Sunday morning and a rooster wakes you. The birds are going at it, the river is doing whatever a river does, and the breeze is moving the curtains in a way that would sell the house to anybody standing in the doorway.

You go out to the courtyard. Coffee. Cigar. You open the electronic descendant of the Moody’s Manual, the volume your grandfather would have had to lift with both arms and a certain amount of grunting, and you begin, as any serious person does, at A.

By the third coffee you are somewhere in the middle of the alphabet and you have developed opinions. You have rejected a Portuguese cork producer whose chairman’s letter opens with a quotation from Camões considerably longer than the financial commentary. You have rejected two Italian holding companies that appear to hold mostly each other. You have rejected a Greek shipping family on the grounds that there were eleven of them on the board and four had the same first name. And you have spent a genuinely upsetting twenty minutes with something in Wallonia that is simultaneously a hotel and a chemicals business and is not forthcoming about which of the two is losing money.

And then you find it.

You stand up the way people stood up in 1953 when something happened. You set down the cigar. You set down the coffee. You call out, in the direction of the kitchen, with the unshakeable confidence of a man who has just completed an entire morning’s work:

“Doris! WE MADE IT!”

Because you have found a company trading at half of tangible book value. Free cash flow positive. Revenues growing. A real business, making a real thing, in a real building, audited without qualification, run by a chairman who is not, and you have checked this twice, because you have learned, presently under investigation by anybody.

You feel, and I want to be respectful here because I have felt it many times, like the luckiest man in Europe.

Doris does not come.

I. You are not first

She has not gone deaf. She worked out some years ago what you have so far refused to.

You are not the first person to find this company. You are not the only one who knows the square metreage of its freehold warehouse, nor the only one with a private opinion about the depreciation schedule on its kilns, nor the only one who noticed the pension scheme is in surplus and felt something stir. There is, statistically, a man in Frankfurt who read the same 2011 annual report you have just read. He read it in 2011.

Several thousand people have been here before you. Every quantitative fund in Europe runs this screen automatically, at four in the morning, in roughly nine milliseconds, without a cigar.

Graham was competing against none of that. He wrote away for the manual, it arrived by post, and he read it line by line, which at the time made him look considerably more unhinged than it makes you look now. That was precisely the point. Nobody else could be bothered. The edge was labour, not insight, and labour is exactly the kind of edge that does not survive a century of technology.

Today the same act of research is a keyboard shortcut, performed simultaneously by everybody, including several people who are not paying attention.

Which leaves the question this whole article exists to answer. If these companies are cheap, and thousands of people can see that they are cheap, why are they still cheap?

II. Cheap is not the problem

The answer is not that they are not cheap. Most of them genuinely are, on the numbers, in the way the numbers are usually read.

The answer is that most of them are not reachable.

Read past the numbers. Look at what the related parties are doing, at how much the insiders own, at who is sitting on both sides of which transaction, and you keep arriving at the same uncomfortable place. The value is real. The value is also not going anywhere, and there is nothing you can do about it.

This style of investing became popular because of Graham and Buffett, and in the retelling it has the shape of a film. Something very cheap. Nobody looking. You buy it, you wait, you become rich. It is an extremely good story and it has produced an entire genre of write-up, several of which I have very nearly written myself.

The reality is a different animal. The competition is ferocious and, on the whole, it is not stupid.

Spend enough time down there and you find that companies trading below tangible book come in two varieties. Neither of them is the one from the film.

The first are the ones that are not undervalued at all. They earn a return on equity below their cost of capital, which makes a discount to book a measurement rather than an error. It is arithmetic: a company earning six percent on capital that costs ten should trade below its book value, and it will keep doing so for exactly as long as that remains true.

The second are the hostages. Real business, real returns, real assets, and eighty percent of the shares in one family’s hands, related-party arrangements running quietly through the accounts, and a distribution policy set by people for whom the discount has never once been a problem.

Buffett was hunting for the third kind, genuinely undervalued and genuinely not held hostage. And when he found one, the part everybody forgets is that he did not sit there.

III. Fifteen years at the same multiple

Here is the moment that tends to end the romance.

You have done the work, you like what you see, and almost as an afterthought you pull the ten-year valuation history to check what the market has historically been willing to pay.

In 2011 it traded at 0.7 times tangible book. In 2016 it traded at 0.7 times tangible book. In 2020, 0.7 times tangible book. And today, 0.7 times tangible book.

Fifteen years. Four recessions and a pandemic in between. Nothing.

That is not a stock waiting to be discovered. That is a stock that has been discovered, repeatedly, by people at least as clever as you, and priced.

From that starting point there are exactly three ways to make money, and each one is harder than it sounds.

The first is to buy it and keep whatever compounds inside the book. No re-rating required. If the company earns a decent return and hands some of it over, you get paid. What you need is a business below book whose return on equity is high enough, and whose buyback or dividend is large enough, that the two together deliver fifteen percent a year without anybody’s permission. That combination is extraordinarily rare. If you find one, tell me, and we will organise a party.

The second is to wait for an event. A take-private, a bid, a liquidation, and the discount resolves overnight in cash while you did nothing except be there. The problem is that it is binary and unforecastable: unless you have inside information or are clairvoyant, you do not know it is coming. And in a liquidation specifically you can make a decent sum, but not a spectacular one, because you are capped by the discount you paid going in.

The third is to do what Buffett did. Get off the sofa, get on a plane, and turn up at the chairman’s house. This is the one that looks most achievable, right up until you look at the register.

Because when you finally find a genuine candidate, a properly good business, undervalued, where a determined shareholder could actually change something, you scroll down to the ownership table and find that seventy-nine percent of it belongs to a gentleman named Jean-Pierre who inherited it from his father and has no intention of doing anything at all.

So unlike Buffett at Sanborn, if you fly out and present yourself at the chairman’s house, what you will receive is three pats on the back and a return ticket home.

IV. What is actually left

Genuine rarities do appear. That is most of the reason I keep looking.

But if your plan is to build a portfolio of fifteen companies trading below tangible book and beat the market with it, be clear about the shape of what you are signing up for. You will very probably end up selling that portfolio below tangible book too.

There are still places down here where value genuinely gets realised. Just not with the paint from the film. Strip everything else away and they come down to three shapes.

Cyclicals, trading below book because their return on equity is sitting in a trough it will not sit in forever. Book value compounders, pushing tangible book upward fast enough that the discount does not need to close for you to get paid. And controlled liquidations, where somebody with the authority has already committed, in writing, to selling everything and handing over the cash.

Some of them offer acceptable returns. A few still offer excellent ones. But every one of them has to be looked at from where you are actually standing, which is not the position of a whole owner.

You are a passenger. And a passenger does not get to ask what this is worth and stop there. A passenger has to answer two much smaller and much harder questions: who hands it over, and when.

Before anybody reads the last two thousand words as a complaint: I love companies trading below tangible book. Chosen properly, the risk and reward down here is more attractive than almost anywhere else in the market, which is why I spend my weekends on this rather than on something restorative. But you have to be ruthless about separating the traps from the reachable, and almost nobody writing about this bothers, because the traps read better.

So here are seven where I think a minority shareholder, forcing nothing, starting no fight and asking nobody’s permission, actually gets paid. Six of them carry a formal 2028 target. Lowest to highest, they run:

+18% · +33% · +52% · +58% · +60% · +76%

With one bull case above two hundred percent, on a margin that company has already earned once, in the same factory, within living memory.

They fall into four groups, and the grouping matters more than the names, because the money arrives from somewhere different in each one, and so does the thing that kills you.

Let’s go.