Time in the Market’s book club – Deep Value and The Millionaire Next Door

Finance books are COOL

Finance books are on the menu!

Deep Value and The Millionaire Next Door are the first books in my book club!

Finance is the topic at hand and will likely be for the foreseeable future.

I read a good amount of books about investing. My problem is that don’t have many people who would be interested in hearing what I think of them.

There’s where you come in gang! Hopefully we can get a discussion started on some of these books.

Every now and then I’ll drop a post here about the things I’ve read. Maybe these thoughts will help you in your investing journey or aid you in finding something new to read.

I’ll try to keep these short and to the point. After all, there’s a book to be read if you want to know more.

My long term goal is to have a page that aggregates all these reviews in one area. That way readers can just go to that page for suggestions!

Note that this series of posts may include affiliate links to Amazon. For additional information, please read my disclosure policy.

As always, I suggest using your library and especially Overdrive if you’re interested in reading any of these books as free is always better than not free!

In this month’s edition, I’ll be talking about two books. Deep Value by Toby Carlisle and The Millionaire Next Door by Thomas Stanley and William Danko.

Deep Value by Tobias E. Carlisle

amazon finance books
I first heard of Toby Carlisle as he was making the podcast rounds talking about his new book, The Acquirers Multiple.

He described that book as a more accessible version of Deep Value which he claimed read like a textbook at times.

The new book wasn’t in my library yet so I decided to give this one a try. After all, who doesn’t love reading textbooks?

First thing to notice is that this is a Wiley Finance book. Typically, these aren’t cheap and this one is no different. Even the kindle version is expensive! I definitely suggest Overdrive if you want to check this book out.

This isn’t an easy read. There’s a ton of information packed into these 240 pages.

Deep Value is essentially split into two parts.

One part recounts the strategies of some of the greatest traders and activists of our time. Multiple chapters discuss the performance and actions of investors like Graham, Buffet and Icahn.

Anyone who knows a lot about them won’t find a treasure trove of new info here. Deep Value does mix it up a bit focusing on their penchant of taking over companies and turning them around.

While I enjoyed the stories, I did found them to be too informational. It did like a textbook at times but I appreciated that the history provided tied into the overall thesis of this book.

The second part deals with that thesis.

Deep Value is all about a specific strategy. In the long run, value beats growth and most of all value beats quality.

That’s the idea behind the title. The book claims that the best long term returns come from these deep value stocks.

In essence, Deep value is an extension of some of the ideas introduced in Joel Greenblatt’s The little book that beats the market.

Greenblatt’s magic formula is a well known value strategy. It is built on the idea that success is driven by buying high quality companies at an attractive price. In the case of the magic formula, quality is defined as return on capital and price is defined as earnings yield.

In Deep Value, Carlisle argues, quite successfully, that removing the quality aspect of the equation actually leads to better returns. It’s an interesting idea and Carlisle provides a bevy of back-tested data to support it.

Deep Value’s central idea is driven by the fact that things tend to revert to the mean. Companies that are quality now(high return on capital) will not necessarily continue being that forever. The market beating returns come from the fact that the market prices those companies to reflect that quality premium.

The idea is that the market overprices quality that may not necessarily be valuable. Following Carlisle’s strategy means you’re doing the opposite. Deep value investors should ignore quality.

That leads an investor to focus on buying companies that are still earning money but may be in the trough of their business cycle. That’s certainly better than buying at the peak.

Deep value’s central claim is that many companies will eventually trend back towards the mean. ROI, ROC and earnings are not something you can depend on forever.  When two companies with similar earnings diverge in price based on their other qualities.

An investor who ignores those other qualities and focuses solely on price will be better off when the trends reverse. Good companies can become bad and bad companies can become good. Investors in “good” companies will lag the market when those companies revert to the mean. Investors in “bad” companies will beat the market when those companies revert to the mean.

In essence, value > quality.

The argument here is that the other qualities like return on capital aren’t useful predictors of results. They’re not something an investor can count on forever. Thus, paying up for them is a bad idea.

Carlisle argues that an investor should take the idea of buying quality companies at a good price and change it. Deep value’s strategy is simply buying companies at a good price. Carlisle provides a ton of backtested data to supports the returns for this strategy.

He also ties the analysis of successful investors into this thesis. Icahn didn’t get to where he was by buying companies when they were at the peak of their cycle. He bought them when they were struggling and turned them around.

Carlisle claims that this type of strategy can help regular investors mimic the returns of all these successful men.

All it takes is having the faith to invest in companies that are struggling and priced as such. That way, one can benefit when they turn around.

That’s the central idea behind Deep Value. The data is there to support this idea. Through this data and his writing, Carlisle makes a persuasive argument.

I’m not sure I agree with every one of his conclusions but they certainly made me think about what I thought I knew about the market.

Deep Value is one of the most interesting books I’ve read on investing in quite some.

One of the intriguing things is that its claims are so counter intuitive. Investors always think that they should be buying quality companies. Carlisle claims otherwise and says that quality doesn’t really matter as long as the company is making money.

The company may look ugly on paper when it comes to other areas but that doesn’t mean it’s a bad investment. The key in all this is that reversion to the mean exists.

That means that historically a portfolio of these ugly companies tends to outperform those ‘quality’ companies.

The idea here is similar to the idea behind Greenblatt’s magic formula. It’s a simple, concrete rule that can be used to develop a portfolio. Data provided shows that a portfolio like that when re-balanced annually has historically outperformed the market.

So the question is whether it’s really that simple? Deep Value provides plenty of data to support those claims. However, just like with Greenblatt’s magic formula, it’s harder to make this work in practice.

As such, I do have some issues with the ideas the book presents.

One is that it’s not easy to find the companies that meet his criteria without a screener. The author does provide a free limited screen online. There are also others that cost money via a subscription. Often books like these are a marketing ploy for a product the author is selling. That’s not the case here as the book makes no mention of these products.

Still knowing that deep value stocks beat the market doesn’t do me much good if I can’t figure out which stocks are deep value easily. The book doesn’t do a great job of telling you how to figure that out. You’re left to search out products such as the one the author provides for that information. Without them, it’s difficult to figure out exactly which companies meet the criteria without a ton of leg work.

My next issue is that the strategy is very active. It requires annual turnover and can add additional costs and taxes in addition to the leg work. It may beat the market in the long run but most investors are probably better of just sticking with the market. An S&P 500 fund is certainly a lot easier even if the returns are slightly worse.

The third is that this is a long, long term strategy. Deep value seems to beat the market but that can take a while to materialize.

Value strategies such as this one tend to under perform in bull markets like the one we’re in now. That means sticking through rough periods which may not always be easy to do with a strategy like this one.

Investing in what the market considers low quality companies isn’t always easy. These companies often have a higher chance at bankruptcy(almost double that of higher quality companies) and other issues. That means it’s much easier to give up on this and go back to something else at the wrong time.

Imagine starting this with a group of thirty stocks only to have three of them go bankrupt in year one. Or imagine doing the same only to have this strategy under perform the bull market three years straight.  That’s certainly something that would rattle any investor and think about quitting.

To his credit, Carlisle does point out these issues and others. He doesn’t claim this is a strategy everyone should follow nor does he push his products.

He just presents an idea, backs it up with facts and lets the reader think about it. Overall, I really liked that approach.

Ideas presented in this book are intriguing and thought provoking. Deep Value is one of the best books on investing I’ve read in some time. The ideas here are fresh and original. Things are counter intuitive and that spoke to me as someone who gets fed the same information all the time.

It’s always good to read something that makes you think about things in a different way. Best of all, Carlisle supports his assertions with solid data and back testing. The writing isn’t always overly interesting. However, the subject matter kept me reading and I burned through this quickly.

In the end it comes down to a simple bet.

Stocks chosen by any of these value screens should revert to the mean. If they do then you have a solid market beating strategy that should stand the test of time.

One of the things this book made me do is think about investing in a different way.

The reality is that it’s somewhat hard to stomach the idea in practice. Companies that meet the criteria are often quite ugly. There’s a reason strategies like these aren’t mainstream.

Stocks that are a good value are often questionable companies in lagging industries. Things look bad on paper. You have lagging growth and bad returns on investments and other negative things.

It simply doesn’t feel right to buy something like that when you could buy high quality growing companies in growing industries. Perhaps that’s why this strategy works in the long term.

The best time to buy is when there’s the most panic in the streets. This strategy is just an extension of that. You’re buying companies that seem like they’re floundering and ready to die. The reality is that most of them won’t and since you bought them at rock bottom prices, you’ll be rewarded handsomely.

It sounds simple and it sometimes is but it’s definitely not very easy.


The Millionaire Next Door by T. Stanley and W. Danko

amazon the millionaire next door

This is a staple in the early retirement community. The millionaire next door is a deep diver into some of the common traits that the authors found during their research into America’s wealthy.

This is a book with a lot of good information. These dudes did a ton of research and present it here in a readable format. That’s about all I can say about the book.

The advice here is solid. The information is interesting but basically boils down to; earn a decent income and live below your means.

Most of America’s wealthy aren’t movie stars or NBA players but regular Joe’s and local business owners who just happen to live a frugal lifestyle.

You can be a UAWs(under accumulator of wealth) or a person who spends a lot or a PAWs(prodigious accumulators of wealth) or a person who saves a lot. The data and the message is great. That’s hard to argue with. However, to me the book seemed like it was about five times longer than necessary.

The authors use a ton of anecdotes and stories. They compare Doctor J to Doctor B then they compare Mrs. K to Mrs. G or whomever to basically say the same thing over and over.

Did you hear about Bob G? He’s a doctor that earns 500k but owns a 2M house and gets a new car every two years. He seems rich but he’s over his head in debt. What a joker!

What about Bob C? He’s an engineer who earns 95k but owns a 200k house and buys used cars. People don’t think he’s rich but guess what. He’s rich!

Those aren’t from the book but it’s pretty much that times 20.

Live below your means, save a lot of money, earn a good income and work for yourself if you can.

There’s some talk about different careers, a lot of time spent on different types of car buyers and various other parts that I didn’t find all that useful.

There are some good insights into first generation immigrants that I found interesting as a first generation immigrant myself. I appreciated some of the info about parenting styles and how those translate to how children deal with money.

I was surprised by how beloved this book is by the community. Perhaps, it’s just the fact that I know all this information and it’s not my first introduction to this topic. I also went in with high expectations based on all the praise this book seems to get. In the end, I found myself disappointed.

This is an interesting review of the research the two authors have done. It’s also a good intro for those new to the potential of early retirement and the benefit of frugality. Beyond that, I just found it be rather boring and repetitive. This is not a book for anyone who already has solid financial habits.

However, I would recommend it to someone who already has luxurious spending habits. It may be an eye-opener in situations like that. If you’re like Bob G and want to become like Bob C then this book might be for you. It is a decent overview of what can happen when you cut back on spending.

Otherwise, it’s just OK.


The Final Word(TL;DR)

TL;DR(too long; didn’t read) is for those who don’t want to read my book report up top.

I did end up writing a bit much on Deep Value. Maybe it’s because I though the book was good.

Here’s some quick final thoughts on each book.

Deep Value is a great read if you want a deep dive into investing strategies and history. Highly recommend but definitely use your library as the price is crazy.

The Millionaire Next Door is a bit boring and overly long. The data is great and the message is right on but I didn’t find to be an enjoyable read. I would only suggest it as an eye-opener for someone who is too enamored with spending.

Please let me know your thoughts on either book. Any suggestions on books to read are welcome via comment or email.


  • Tom from Dividends Diversify

    Hi Time, I read Millionaire Next Door when it first came out (mid 90s?). That and another book “Work Less, Live More” became the basis for my pursuit of FIRE when I was in my 30s. Before the term became popular. I really loved Millionaire next door when I first read it. But when I went back to it years later, I agree with you that is was a little basic and boring at that point. Deep value sounds interesting, but probably doesn’t fit with my DGI strategy. Nice post. Tom

    • TimeintheMarket

      Yea Deep Value is it’s own interesting strategy that most people likely won’t follow for various reasons – still an interesting book with a lot of takeaways.

  • More Dividends

    Of the two I have only read the Millionaire Next Door. It was a good presentation of the findings from their research but it didn’t add much value to my investing strategy.

    I will have to give Deep Value a read when I have some free time. Thanks for sharing.

  • Financial Shaper

    Absolutely agree, finance books are cool!

    I read „The Millionaire Next Door“ almost ten years ago and it was at that time I took the decision to consistently increase my savings rate and to invest for the long run.

    Millionaires tend to engage in „dull-normal“ businesses, they don‘t chase ventures etc. That had to some extent an impact on my investment approach; I love businesses to invest like Heineken, Coca Cola, PepsiCo, JM Smucker, Unilever, Nestle, ReckitBenkisser, Henkel etc. with well known brands and simple business model.

    Enjoyed reading your reviews, thanks for sharing.

    • TimeintheMarket

      Thanks for the visit FS. I do agree that I’d have probably gotten a lot more out of The Millionaire Next Door if I read it early on in my investing career.

  • Frankie

    Great review of Deep Value TimeintheMarket – having read so many investing books over the years I thought I wouldn’t find many more that would interest me – but you’ve got me interested with this one!

    Funnily enough I used to focus much more on these sort of companies that were beaten down heavily, but had since felt the pull towards more ‘quality’ companies for the long run – the deep value approach definitely takes much more diligence and time, as well as a stronger stomach!

    Halfway through your post I went online to check out the book and was shocked at the price!! (which you also mentioned at the end!) Not sure about my chances finding it in the library, but does your 4.5 / 5 rating include the price tag? (I suspect the price is not ‘Deep Value’, but hopefully ‘Fair value’??)

    • TimeintheMarket

      Have you tried Overdrive if you have an e-reader? That’s where I found mine and I certainly would have never read it if I had to buy it. This is a book with a lot of good info so it’s probably worth it since it’s a book I’ll probably re-read again in the future and that’s always a good sign for a solid book. I’m sure there’s a lot of info in there I didn’t properly digest with my first read.

      If you don’t want to spend the cash, search Tobias Carlisle Google on youtube and watch the author’s talk at google as it does a good job of talking about the ideas from the book.

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