The Letter — Discovery Issue: Anatomy of a Discount, from the First Figure to the Last

Why this issue

Most market letters ask you to trust them. This one takes the opposite bet: to convince you by showing, never by asserting.

So we've decided to open a real file for you, from the first figure to the last. A company our method selected nearly four years ago, one we followed while hiding nothing from you, and whose story is now over: we no longer hold a single share, and our ranking no longer favors it. We can therefore speak freely, without handing you a "hot" idea. The point is not to whisper a purchase in your ear, but to let you watch a method at work, with the perspective that only time provides.

You'll see a discount emerge, a thesis built on verifiable ratios, patience doing its thankless work, and then discipline commanding the exit. Above all, you'll see that nothing in this story owes anything to genius or divination. It all owes to process: buying what the market marks down without sufficient reason, insisting on quality, and waiting. That is less spectacular than a prophecy. It is far more reproducible.

Let's open the file.

Act I — The story of a discount

As 2022 began, a company listed in New York traded at around $27.60 a share. Let's call it by its name, since the case is closed: Warrior Met Coal, an American producer of metallurgical coal — the kind used to make steel, not to generate electricity. The distinction matters: this is not a bet on thermal energy but an industrial link in the global steel chain.

The market, at that point, wanted little to do with it. An unloved sector, judged to have no future by the money that was then chasing growth and technological promise; a cyclical business whose results depend on a commodity price no one controls. All good reasons, on the surface, to walk on by. It was precisely in that disaffection that the discount sat.

What did the accounts for the year just ended say? Here is the company's fundamental snapshot, as the method read it:

Let's read this table together, because every line tells us something.

First, a modest price relative to substance: at 3.5 times operating income, you were paying very little for the company's ability to produce profit. The price exceeded net book value by only about a third — so you weren't buying a mirage, but plants, reserves, a genuine industrial base, for barely more than their carrying value.

Next, and this is the most striking point, a free cash flow yield above 20%. That figure measures the free cash the business threw off each year, set against its enterprise value. More than twenty cents of real cash for every dollar of value: in a cyclical sector, that kind of cash generation is a bulwark. It lets a company buy back its own shares cheaply, repay debt, and ride through the troughs without buckling.

Finally, the strength. Net debt near zero — cash all but covered the borrowings — an operating margin of 23%, and a return on equity of 17%. This is what separates a true discount from a mere markdown: here was a profitable, lightly indebted company, not a carcass dumped for good reason.

The method did not "like" Warrior Met Coal. It noted, coldly, the coincidence of a low price and real quality. That is all we ask of it.

What Graham and Buffett tell us

Let's pause, because this case illustrates, to the letter, three ideas that are more than a century old and haven't aged a day.

The first is the distinction between price and value. Benjamin Graham, in The Intelligent Investor, imagines "Mr. Market": a partner who, every day, offers to buy your stake or sell you his, at a price dictated by his mood. On some days he is euphoric and overvalues everything; on others, depressed, he dumps. In January 2022, Mr. Market was gloomy on metallurgical coal — he was offering a profitable industrial asset at 1.6 times its net book value. The intelligent investor does not let himself be infected by the mood; he takes advantage of it. The discount is nothing more than the distance, on a given day, between that mood and real value.

The second is the margin of safety, which Graham held to be the three most important words in all of investing. To buy well below value is to give yourself a cushion: no one knows the future, and the most careful estimate can be wrong. Paying $27.60 for a business that was plainly worth more, backed by tangible assets and abundant cash, was exactly that — not a promise of gain, but protection against loss. Had the thesis proved too optimistic, the gap would have absorbed part of the error.

The third is quality, which Warren Buffett added to his mentor's legacy, under Charlie Munger's influence. Buffett moved the original Graham approach — the "cigar butts" you pick up for one last free puff — toward the search for solid companies bought at a reasonable price. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," he liked to remind us. The return on equity, the margin, the controlled debt of Warrior Met Coal all said this was no cigar butt, but a business able to wait for the market to do it justice. A profitable, lightly indebted company can be patient; a fragile one deteriorates before the discount ever closes.

Walter Schloss, a quiet disciple of Graham, added the virtue of numbers and constancy: hold many discounted lines, don't dig in on a single one, let diversification smooth out the errors. Joel Greenblatt, later, showed that cheapness and quality could be combined systematically. It is in this lineage that we place ourselves — not by reciting these masters, but by applying, figure after figure, what they demonstrated.

Act II — Patience rewarded

What remains is the hardest part: doing nothing.

Because a discount does not close on command. Between the purchase and the reward lies time — and time, for a cyclical, is paid for in volatility. Warrior Met Coal's price did not reach its value in a straight line; it swung, fell back, rebounded, testing conviction with every jolt. This is where most investors lose the game: they buy well, then sell too soon, chased out by the noise.

The method, for its part, does not flinch. It had bought for reasons expressed in figures; as long as those reasons held, it held. So it waited, through the troughs, for the value to be recognized.

It was. In November 2025, the position was closed at $78.78 a share — against $27.60 at entry. A gain of +185% in nearly four years. Not a stroke of genius: the mechanical outcome of a purchase below value, of a quality that allowed the waiting, and of a patience that refused to give in to the noise.

But the most instructive part of the story may be the exit. Why sell a winner? Because the discipline that tells you to buy cheap also tells you to leave when that is no longer the case. At nearly $79, the discount that justified the position had closed: the market had done the company justice, and at times more than justice. The method's role ended there.

The proof is before your eyes today. In our current ranking, Warrior Met Coal earns a score of only 35 out of 100, far from the top, with a discount now down to zero. The method liked it when it was cheap; it turned away the moment it stopped being so. That, in fact, is why we can speak to you about it openly: there is nothing left to do. The value was captured, then handed back to the market. Selling is never a verdict on the company; it is a reallocation toward where the discount now lies.

The trap the method refused

A method is judged not only by what it buys, but by what it refuses. Because for every discount that rewards patience, there are others that punish it — the famous "value traps," stocks that look cheap precisely because they deserve to be.

At the same time, in early 2022, another company was showing investors an attractive face: Medical Properties Trust, a REIT specializing in hospital real estate. It traded around $24, paid a generous dividend, and changed hands below the stated value of its property portfolio — the very picture of the "defensive and cheap" stock that income investors look for. Many bought it for those reasons.

We never held it. Not out of instinct, but out of filter. Because behind the façade, the balance sheet told a different story: net debt of nearly 7.5 times operating cash flow (EBITDA), and interest coverage down to 2.6 times — in other words, a company whose operating income covered the interest on its debt barely more than twice over. That kind of leverage is not an accounting abstraction: it is a vulnerability. All it takes is for the tenants — here, hospital operators themselves fragile — to stop paying, and the structure wobbles.

That is exactly what happened. Tenant troubles, asset sales under duress, a slashed dividend: the stock has since lost nearly 80%, falling from $24 to under $5. The discount was not a bargain; it was a warning.

The lesson is at the heart of our discipline. Warrior Met Coal and Medical Properties Trust displayed, on the surface, the same promise of cheapness. Everything separated them on the balance sheet: on one side net cash and no debt, on the other leverage of 7.5 times. The first returned +185%; the second cost 80%. Graham sensed it in his own way: a stock is not cheap simply because it has fallen. A low price is never enough — the company must also be strong enough to wait for its value to be recognized. It is that discernment, as much as the search for the discount, that does the work.

The method, without the recipe

By this point, we always get the same question: what, exactly, is your formula? We always answer with the principles, because they are what illuminate — the parameters, on their own, teach nothing.

What we can say comes down to a few traits. Our universe is American small and mid caps — about 180 companies — because that is, statistically, where value stays the least picked-over, and so the most often mispriced. There we apply three requirements: a discount to our estimate of intrinsic value, real quality (profitability and margins), and balance-sheet strength (controlled debt, which gives the company time to wait). It is that last filter, precisely, that led us to select Warrior Met Coal — and to pass on Medical Properties Trust. The whole is applied mechanically, month after month, without sentiment or pride: the process decides, never the mood.

What we will not disclose, on the other hand, is how these elements are weighted precisely, at what thresholds a stock enters or leaves, or the formula that assembles them. Not out of vanity, but because a method disclosed in detail dilutes as it is copied. The principles belong to everyone; their fine tuning is our workshop, and the Warrior Met Coal case shows well enough that it works to keep it.

What it's worth, on a larger scale

A single case, however clean, could be nothing more than a lucky break. That is why the true measure of a method is not a story but a repetition. Here, then, plainly, is what our three model portfolios show over roughly five years of data.

Two words of honesty are in order. First, these are backtests — simulations applying our rules to past data. A backtest is not a brokerage statement: it illustrates how a method behaved over a given period, enjoys the comfort of hindsight, and says nothing about the future. We present it for teaching, not for seduction. Second, note that the Équilibré portfolio (25.2% per year) beats the Offensif (23.6%): "more aggressive" does not mean "higher returns." The extra volatility does not automatically convert into gain — a useful reminder, against many intuitions.

What is striking in these figures is not so much their level as what they say about compounding. A few extra points of annual return, compounded over five years, open a considerable gap: that is the virtue of the long term, the one the patient investor lets work for him. The Warrior Met Coal case was just an illustration; the method itself is built to be applied dozens of times, year after year, letting numbers smooth the errors and discipline do the rest.

In a word

If you take away only one thing from this issue, let it be this: the method works not because it is brilliant, but because it is disciplined. It buys what the market marks down without sufficient reason, it insists on quality, it refuses fragile balance sheets, it waits, and it knows how to leave. Warrior Met Coal required neither prediction nor luck: only the steady application of century-old principles — and the nerve to hold when others let go. Medical Properties Trust, for its part, reminds us that knowing how to say no protects as much as knowing how to choose.

It is this discipline, embodied each month in real, numbered cases, that members of the Value Investing Club receive. Not promises: files, from the first figure to the last.

Glossary for this issue

Margin of safety — The gap between the price paid and the estimated value of a company; the wider it is, the more it protects the investor against his own estimation errors and the vagaries of the market.

Free cash flow yield — The free cash generated by the company set against its value; it measures the cash actually available for shareholders and debt reduction (over 20% for Warrior Met Coal at entry).

EV/EBIT — The ratio of enterprise value (market capitalization plus net debt) to operating income; it gauges the price paid for operating capacity, independent of financial structure (~3.5× at entry).

Price / book (P/B) — The ratio of the share price to net book value per share; at or below 1, you are paying barely more than the accounting value of the company's assets.

Cyclical — Said of a business whose results swing sharply with the economy or commodity prices; pessimism there often creates the deepest discounts — and demands the most patience.

Net debt / EBITDA — A measure of debt relative to the company's annual capacity to generate operating cash flow; the higher the multiple, the more fragile the company (≈ 0 for Warrior Met Coal, ~7.5× for Medical Properties Trust).

Value trap — A stock that looks discounted but whose low price reflects a real and lasting weakness — often a fragile balance sheet; the markdown there is earned, not offered, and the discount may never close.

The Letter is a document of information and education. It constitutes neither personalized investment advice nor an inducement to buy or sell any security. The case presented is closed and is not a recommendation. The returns discussed come from backtests and do not prejudge future results. Each investor remains the sole judge of his own decisions.