With all the Coca-Cola drinking, Fruit-of-the-Loom ukulele solos, and statements about loving to hold stocks forever, you’d be forgiven for thinking that Buffett is a buy and hold moat investor.

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And, if you have, you’re in good company. Many value investors have fallen into the Warren buffett trap without realizing it.

But the reality is really that Warren Buffett is a deep value investor. Not realizing this means earning far lower returns than you otherwise could over the course of your life - leaving millions on the table.

Deep value, somewhat different form classic value investing, is a strategy that focuses on buying firms at large discounts to a company’s current earnings, cash flow, or assets. Rather than looking for shallow discounts based on assumed growth rates, deep value investors hunt for companies trading at tiny PEs, or prices relative to net asset value, often due to big business problems.

At first glance this seems polar opposite to the sort of companies that Buffett buys today. He picked up Apple in 2016 based on the company’s strong brand and expected future earnings, after all. He’s also well known for his investment in Solomon Brothers, Sees Candies, and GEICO. These are anything but deep value firms - they’re strong growing businesses with durable competitive advantages… or moats.

But these are also the investments of a man who’s had to compromise due to the reality of his situation now, today.

Over the course of his career, Buffett has made a lot of contradictory statements that have confused a lot of people. For example, “Our favourite holding period is forever,” is commonly referred to by those intent on holding their value stocks until the return of Christ. Others parrot the advice that “time is the friend of the wonderful business, the enemy of the mediocre,” as strong evidence to support the fact that investors should be buying great businesses.

Both of those statements are true, within a certain context. Time really does help great businesses compete against their more lousy peers and these sorts of firms can often earn a better long term return on capital due to strong competitive advantages. And if you have to buy great companies due to particular restrictions you face as an investor, you might as well hold the best you can find forever.

The problem is that a lot of these statements are blatantly contradicted by other statements he’s made in the past. Consider this one:

“Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.”

How is it that Buffett, buying large growing firms with massive competitive advantages, is now buying… worse investments?

One hint was given in his 2014 shareholder letter:

“My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance.

Even then, however, I made a few exceptions to cigar butts, the most important being GEICO. Thanks to a 1951 conversation I had with Lorimer Davidson, a wonderful man who later became CEO of the company, I learned that GEICO was a terrific business and promptly put 65% of my $9,800 net worth into its shares. Most of my gains in those early years, though, came from investments in mediocre companies that traded at bargain prices. Ben Graham had taught me that technique, and it worked.

But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only to a point. With large sums, it would never work well.

In addition, though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating. (Berkshire, it should be noted, would have been a highly satisfactory “date”: If we had taken Seabury Stanton’s $11.375 offer for our shares, BPL’s weighted annual return on its Berkshire investment would have been about 40%.)”

This is more a sledgehammer to the idea that buying and holding moats is the best way to earn great returns, than a subtle hint. Here, Buffett clearly states that the reasons he shifted from buying deep value firms were issues relating to scalability and the desire to build a large enduring enterprise. Cigar-butts were not businesses to hold forever; and a great business is not always a wonderful buy.

So what should you make of all the talk of wonderful companies at fair prices being better to invest in than terrible firms trading at cheap prices?

Well, one explanation is that he is mostly discussing investing with those who will manage large amounts of institutional money. He’s often talking on CNBC or to MBA students - future institutional money managers responsible for hundreds of millions or billions of dollars. It’s a mistake to think that you, as a small investor, are in the same camp.

In fact, when specifically asked about managing small amounts of money, Buffett’s answer was radically different:

“Yeah, if I were working with small sums, I certainly would be much more inclined to look among what you might call classic Graham stocks, very low PEs and maybe below working capital and all that.”

In other words, deep value.

And he’s not just talking about traveling back in time to the 1950s, either. You can learn most about someone’s preferences based on what they do. That’s why 2004 was so instructive.

In 2004, he was handed a securities manual for South Korea and spent an afternoon combing the listings. He ended up putting $100 million of his own money into 20 deep value stocks. When discussing this, he was paraphrased as saying:

“Citicorp sent a manual on Korean stocks. Within 5 or 6 hours, twenty stocks selling at 2 or 3x earnings with strong balance sheets were identified. Korea rebuilt itself in a big way post 1998. Companies overbuilt their balance sheets – including Daehan Flour Mill with 15,000 won/year earning power and selling at “2 and change” times earnings. The strategy was to buy the securities of twenty companies thereby spreading the risk that some of the companies will be run by crooks. $100 million was quickly put to work.”

Buffett could have invested in anything. He could have bought more of his beloved Coke, or found additional firms with wide moats. Instead, he placed $100 million of his own money on deep value firms. When given complete freedom, Buffett prefers deep value.

While a lot of investors get tripped up trying to become the next Warren Buffett, we’ve doubled down on seeking out the best deep value stocks we can find. This means employing the best performing deep value

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