Value investing is a strategy of buying stocks trading below their intrinsic value, popularized by Benjamin Graham and Warren Buffett, though it underperformed growth investing for much of the 2010s.
Core Philosophy
Value investors seek:
- Companies trading below book value or historical averages
- Low P/E ratios (price-to-earnings)
- “Margin of safety” (buy at discount to intrinsic value)
- Long-term holding (years, not months)
Graham and Buffett Legacy
- Benjamin Graham (The Intelligent Investor, 1949): Father of value investing, quantitative screens
- Warren Buffett (Berkshire Hathaway): Graham’s student, focused on quality businesses at fair prices
- Charlie Munger: Buffett’s partner, “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price”
Lost Decade (2010-2020)
Value investing struggled:
- Growth stocks (tech, FAANG) dominated
- Low interest rates favored growth over value
- “Value traps” (cheap for a reason: dying industries)
- Indexing reduced price inefficiencies
The NASDAQ (growth-heavy) outperformed value indexes by 300%+ during the 2010s.
Key Metrics
Value investors screen for:
- Low P/E ratio (price-to-earnings)
- Low P/B ratio (price-to-book)
- High dividend yield
- Low debt-to-equity
- Consistent earnings
Modern Value vs Growth
| Value Stocks | Growth Stocks |
|---|---|
| Banks, energy, industrials | Tech, biotech, e-commerce |
| Mature businesses | High-growth potential |
| Steady dividends | Reinvest profits |
| Undervalued by market | Premium valuations |
2022 Comeback
Value investing resurged in 2022 when:
- Rising interest rates hurt growth stocks
- Energy stocks boomed (oil, gas)
- Tech crashed 50-80%
- “Value is back” proclamations
Criticism
- Too focused on past metrics (ignores innovation)
- “Value traps” (Sears, GE, etc.)
- Misses transformative companies (Amazon traded “expensive” for 20 years)
- Requires patience (years of underperformance)