Practice Problems Reading 17 - Active Equity Investing

During the next few months, Dewey rebalances the Purity Fund to reflect his fun- damental active investment process. Dewey and Sardar meet again to discuss potential new investment opportunities for the fund. Sardar recommends the purchase of AZ Industrial, which she believes is trading below its intrinsic value, despite its high price-to-book value (P/B) relative to the industry average.

Which investment approach is the most likely basis for Sardar’s buy recommendation for AZ Industrial?

A Relative value
B High-quality value
C Deep-value investing

Why is it B and not C?

High P/B would not indicate deep value

did you read the full sentence? It also says it is trading below its intrinsic value

also if you want to focus on P/B. High P/B means growth investing.

Hi, because its trading above its book value but below the intrinsic value which he has calculated. Had it been trading below book value then it would have been deep value.

Deep value was based on Benjamin Graham book “Security Analyst” which he always emphasized that a good company is bought at Book value or below, ex: if PBV=0,6 then it’s cheap, if the PBV=4, then it’s expensive and won’t be a good bought. Then in Berkshire shareholder meeting, Warren said about how he always agreed with Graham method except one thing, and that’s Deep Value Investing. Warren argue that a good company shouldnt be based on only the book value. For example, a tech company could have low book value, but still produce so much earning, if we think about it then that means the company could grow even without right issue or public offering. That’s why its more of a high quality value of a company

ok but i feel when you read the question, there is nothing clear cut in it. Like i feel there are lot of open interpretation. I wouldn’t have said at all it is a high quality value company