A practitioner's analysis of buying statistically cheap companies

There are two parts to this answer. Part 1 is to ensure your capital allocation on a networth level is correct. I have 55-65% of my entire networth invested in equities. I make it go down to 55% in times like these when markets are at a high and I’m a seller in a rising market and I take it up to 65% or so when there’s a crisis. (Remember the basics: buy low, sell high).

Having decided this part, then part 2 of the answer is to simply follow some time-tested rules. I broadly follow Walter Schloss method with only a few modifications. It’s neatly summed up by some blogger in the graphic below (I have posted this earlier in other threads also).


(from The Profoundly Simple Wisdom of Walter Schloss on Producing Towering Returns )

Few modifications are:

  1. I look for P/BV but also for Dividend Yield and EV/EBITDA when screening for cheap companies - these are all standard valuation metrics.
  2. At 40-50% rise in stock price, I part-exit (not fully), and hold on the rest with an expected time frame of multiple decades, however, on an ongoing basis I always read the annual report and scan primarily for the two things I mentioned previously: a. Debt (“No company went bankrupt without taking debt”) and cash flows and b. Promoter issues (mostly audit observations, contingent liabilities).
  3. When I average down, I stop buying when the single stock position becomes about 5% of my portfolio (or correspondingly: 3% of my networth). My loss in LEEL was 5% of my portfolio, the biggest sting.
  4. Although the method recommends not having a single stock go above 20%, I am comfortable with higher allocations as the price rises. This is necessary as my holding period is measured in decades. As Nassim Taleb describes in the Black Swan, 80/20 rule and 50/1 rule are the same. 80% x 80% x 80% of the returns will come from 20% x 20% x 20% of the investments. It also means that 4 out of 5 of my stocks go to zero over long term, and I’m comfortable with that.

If i am not mistaken though,Schloss 's returns were about 15 percent annually for 40 year time frame.
Is it really a good strategy vis a vis Graham’s net net strategy.What have your returns been like?

A very good writeup. I started out my investment journey investing in statistically cheap, decent quality companies the results were mixed bag. I gradually moved towards quality business with stable but a lower return.

One of the biggest challenge I faced was guaging the promoter quality. My failures were due to promoter frauds. How do you address this problem?

I could make out - operational issues , setback in product, slowdown in end consumer industry , rising .RM prices etc. Promoter integrity issues led to the losses. How do you mitigate those


@theashworld Just gone through your post & find out all winners & links of VP threads along with your purchase details. But it’s my query you had join the VP forum on last July20 & all of your shared details are pretty old then what is the value of sharing your holding details. Apart from that, I beg to differ that all the cheap companies turned out from ashes which I’m missing in your post.
Admin can delete my post if it’s not aligned with the guidelines of VP forum…


Fully agree with your question? As usual there can be a survivor bias. Not all cheap stocks are Pheonixes and most do bite the dust. We all try to sell the stories of success.


yes, it’s a work in progress for me as well and mostly my losses are because of promoter integrity. I think one of the best resource in this matter is

and indeed, all posts by @varadharajanr are enlightening. Do check out his valuable video as well Indian Investing Conclave

The other two key things to look out for are

  1. Cash flow as a proportion of PBT (over multiple years)
  2. Taxes paid as a proportion of profits (“Nobody pays real taxes on fake profits”).

In general, I can also argue the other way though - at what point and on what basis can you say that a particular promoter is not fraud? Remember, the fraud ones are masters of delusion, it’s non-trivial to see through it. I am happy to receive suggestions in this regard and improve my learnings further.


Thanks a lot for your inputs. I will keep adding here as and when I have something worthy of adding

Hi @theashworld it is good write up
instead of being subjective , can you become objective i.e can you please tell as below
ROE > 20 & PE < 10 etc

@theashworld It would be much more helpful if you can add your learnings from losers in your portfolio. As losers remind & teach us more than winners.

Not really it is fairly priced if you actually know about the company

Have you looked at GPIL, which is trading at nearly 2.6 PE and half the valuations of its peers like sarda energy and shyam metaliks?

I have taken a shot in these posts-

  1. Comparison with sarda- Manas Portfolio - #39 by Kumar_manas

  2. Earnings calculation - Godawari Power - Any Trackers? - #316 by Kumar_manas

This looks pretty cheap statistically or not? Would be happy to get your views.

Thank you


It is not.

Check the OPM% and ROCE for the current year and you will understand.

Cheap does not always mean undervalued. My aim is to find undervalued companies which can give the earnings to use in one way or the other. But if you have more ideas do share I would love to look into it.

Could you please elaborate more on this? I am curious to understand why it trades at such seemingly cheap valuations. Going by the data on screener its OPM has stayed above 30%, its book value is 182 yet it trades at less than half of this, ROCE is pretty low however. I do not know much about the company so if you could kindly briefly explain about it and why it trades at such seemingly cheap valuations it would be really helpful

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Please watch this lecture from li lu for more clarification.

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What do you think about PFC/REC. Personally I have invested 22% and 8% of my portfolio in PFC/REC respectively. 3% hudco and 3% irfc 5% sjvn. These are the value buys in my portfolio.

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Only checked the first two -

My take- what is the down side protection ( both companies have 3lakh cr plus debt)

What is the return you are expecting ( if you are a small investors then why would you invest in a company that has $5 billion in market cap. I mean for you to actually double your money the company will need to go to $10 billion aka needs to double there profit as this is not undervalued because there is nothing left on balance sheet that can protect you, How many companies in india are doing almost $1 billion in profit ? ( REC earned 9000cr thats like $1.2 billion ) do you have a high probability that the company can go from 9000cr the 18000cr even in next 5-7 years because if it cannot then you cannot double your money in next 5-7 years (thats like 16-19% cagr) which should not be your aim anyways if you are a small investor. Note that 16-19% is literally great but aiming for this would not actually give 16-19% cagr hence you should aim for 20-25% and then your actual return can be 15-17%cagr ( only if you are lucky because the total return for last 200 years after the westernization has been 6.6% hence if you can even get 10-11% for long term you are going to be the richest person on this planet )


What do you mean 3 lakh crore in debt??
Its a finance company, it borrows and it lends. PFC has book value of 66k crore and rec 50k crore.

Downside Protection? Dividend yield… just 9 percent.

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I’m not sure if it is a good idea to invest in companies that give dividend instead of reinvest the same in business that too for a business where money is the raw material. Dividend distribution tax was more tax efficient for an investor than taxing in the hands of the investor. Now for many, it will be on 20% to 40% slab.


Well yeah, ideally a buyback is much much better.
But, just see the dividend is just 30% of profits. 70% is reivested!! And that 30% gives 9% dividend yield!!