An everyday example that illustrates the value investor mindset

I’m taking a departure from my usual research with this article to describe a time, before I started my investing journey, when I unknowingly applied a value investor mindset to an everyday financial decision - selecting an apartment to rent.

Back in 2019, a couple of years after I graduated from university, I decided to return to academia to study for a PhD and got offered a position in the computer science department at the University of York. This ultimately didn’t work out, but that’s a story for another day.

At the time, I was living in a small town in Cambridgeshire, around 2 hours from York, and needed to secure some accommodation before I could move. Since I was still working, I had limited time to travel up to York to view properties and couldn’t move as fast as local residents when new properties came on the market. It also became apparent that I was seen as a relatively high-risk tenant by landlords, due to the fact I wasn’t already established in the area and working. While I had been granted a stipend, and separately offered a part-time role elsewhere, neither had actually paid me anything at that point and I was losing out to other people on every attractive property for which I applied.

It was starting to look like I would have to get somewhere more remote, which was not ideal as I didn’t have a car at the time, or in a bad area. Then I came across what appeared to be a great option: a spacious, centrally located, 2-bed-2-bath apartment with its own dedicated parking space (giving me the option to get a car in the future) in a good area, at an affordable price. This seemed too good to be true: worse properties were being snapped up within a week, and this one had already been listed for more than two. I assumed there must be something wrong with it, but expressed my interest to the estate agent and booked a viewing.

As soon as I stepped into the apartment I realised why it had been passed over: two women had been living there and the place was an absolute mess. The apartment came unfurnished and neither girl had purchased any furniture, meaning they’d been sleeping on mattresses on the floor and their clothes were strewn everywhere. You could barely see the carpets in the bedrooms beneath a mass of hair and other detritus, and I don’t think you want to hear a description of the bathrooms. All the pictures shown on the listing were from before the girls had moved in, and therefore belied the current reality.

This is where the value investor mindset comes in. Looking past the immediate issues, which had scared most people off, the underlying fundamentals of the apartment remained sound: it was spacious, centrally located in a good area with a dedicated parking space and affordable rent. From this perspective, the immediate issues had created an opportunity for me to get a property otherwise inaccessible had it been issue free.

However, there still remained the immediate problems to resolve. I asked the estate agents, who also managed the property, whether they would be carrying out a deep clean before the new tenant moved in. They assured me this would be the case, and I asked for it to be added to the tenancy agreement before I signed and paid the deposit. The estate agents had a pretty good reputation, so I felt reasonably confident putting my faith in them to sort it out.

Around a month later, we moved in, and experienced something value investors commonly encounter when investing in business recoveries: things getting worse before they get better. The property had been unoccupied for several weeks prior to our arrival, and while the estate agents had been true to their word on cleaning the apartment, there had been a slow leak from the apartment above’s recently installed washing machine which had gone unnoticed due to our apartment being empty. We walked into the kitchen to find an entire corner of the room covered in black mould, rendering it pretty much unusable.

Thankfully, the property manager lived up to their reputation and had it sorted within a week. From that point onwards, the apartment delivered on my expectations and served us well over the two years we lived there.

When we moved out, the property was clean and well maintained, leaving nothing to repel prospective tenants. The landlord relisted it with a rental price 25% above what we were paying and found a new tenant within two days.

I feel this story is an excellent analogy for the kind of opportunities I’m seeking as an equity investor: good, resilient businesses with strong fundamentals facing short-term problems that have put them out of favour with the market and depressed their share price. Resilience is essential, as situations can always deteriorate further and a company needs to be able to survive the turbulence with shareholders’ capital intact. Provided it does survive, the eventual recovery in business performance and share price can provide outsized returns to investors who bought when pessimism was rife.

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