Value investing is the stock-selection strategy famously used by Warren Buffett, one of the world’s wealthiest people. Developed in the 1930s by Columbia University professor Ben Graham, value investing involves screening securities to find stocks undervalued relative to their peers and the market. Stocks are then assessed for their intrinsic value – determined by a fundamental metric such as the price-earnings ratio – and bought only if the price is less than that intrinsic value.
With value investing, dividends, cash flow and earnings growth matter more than short-term market factors. The idea is that the market will eventually correct, and when it does, the undervalued stock rises and the investor profits. Buffett’s investments have consistently outperformed the market decade after decade, earning him a reputation as the standard-bearer of value investing.
Warren Buffett’s story
In the early 1950s Buffett found success following Graham’s guidelines, but began to assess stocks differently from his mentor. Where Graham focused on the numbers in the balance sheet and income statement, Buffett also looked at a company’s leadership and its potential to generate earnings over the long term. In 1962 he began buying Berkshire Hathaway, then a failing textile company, phased out its textile division and transformed it into a holding company for investments across insurance, energy and media – building it into the hugely profitable business it is today.
Rethink your diversification strategy
Buffett recommends selecting stocks carefully, with an eye on the long-term future, and maintaining focus on individual investments rather than hedging bets with a broad portfolio designed mainly to minimise volatility.
Don’t overreact to the news
Buffett cautions investors not to sell the moment a stock’s value appears to dip – overreacting to a sliver of the daily financial news is how many investors lose out.
Play the long game
His approach requires patience and commitment: select stocks with potential and hold them for years, even decades. Investors who constantly buy and sell may miss higher returns and pay more in trading costs and tax. If you’d like to explore value investing further, there are many reputable books and educational resources on the topic – and professional advice tailored to your circumstances is always worthwhile.
General advice warning: This information is general in nature and does not take into account your objectives, financial situation or needs. Investing carries risk and past performance is not a reliable indicator of future results. Seek personalised advice from a licensed financial adviser before making any investment decision.