Warren Buffett has long been a proponent of value investing. This strategy has helped him amass a personal fortune of around $150 billion. Value investing is an approach that emphasizes taking the long view.
It involves holding one’s nerve and avoiding risky behavior. Buffett learned these principles from economist Benjamin Graham’s 1949 book, “The Intelligent Investor.” Value investing refers to buying a stock that is trading below its intrinsic value. Guy Spier is a self-proclaimed “disciple” of Buffett’s.
He explains that what many consider a value stock is something that is cheap by objective measures. These include the price-to-book ratio or price-to-earnings ratio. A price-to-book (P/B) ratio below 1 suggests a stock is undervalued.
This is because the company’s assets would be worth more than the value of its shares if sold. A low price-to-earnings (P/E) ratio indicates that a stock’s price is low compared to the company’s earnings per share. Value investing requires a rational approach.
It focuses on how much a stock might be worth in the future. It often takes a contrarian approach, targeting stocks overlooked by the market. Buffett has warned against risky behavior or jealousy when other investors do well.
He looks to invest in companies operated by honest and competent people. Value investors aim to hold stocks until they reach what they calculate to be their intrinsic value. This can take years.
Spier said “What counts is buying a good business at a decent price and then forgetting about it for a long, long, long time.”
Buffett has voiced similar sentiments. He noted his ideal holding period is “forever.” However, value investors usually sell stocks when they reach their calculated worth. This long-term holding strategy means value investors are less concerned with short-term market factors.
These include political events or conflicts. Bill Nygren is a value investor who manages the $23 billion Oakmark Fund. He emphasized looking at industry growth, company cash flow, and how it will be deployed over a multi-year period.
This is rather than focusing on short-term fluctuations.
Timeless strategies for value investing
The MSCI World Value Index comprises large and mid-cap companies from 23 countries.
Major constituents are in financials like JPMorgan and Bank of America, and healthcare firms such as Johnson & Johnson and pharmaceutical company AbbVie. The index’s second-biggest constituent is Berkshire Hathaway, Buffett’s holding company. However, the MSCI World Value Index has underperformed the market overall.
It logged annualized returns of 8.26% over the past decade compared to the MSCI World Growth Index’s 13.56%. Sam Ziff is the chief investment officer at Oldfield Partners. He cited insurance company Chubb and Swedish bank Handelsbanken as examples of successful value investing.
Chubb has maintained an average combined ratio of 87.7%. This is a measure of premiums collected versus claims paid, indicating profitability. Ziff noted Handelsbanken has been conservatively managed.
It trades at a lower P/E ratio than many U.S. banks and offers a dividend yield of more than 10%. If you’re interested in value investing, it may be worth looking beyond the U.S. According to Morningstar, the U.S. appears “expensive” as 2025 begins. Opportunities might be found in U.K. homebuilder stocks and European auto stocks, where there are “huge discounts.”
Most of Buffett’s investments via Berkshire Hathaway are in U.S. companies.
These include Apple, American Express, and Bank of America. However, Berkshire also owns stakes in Japanese trading houses like Itochu and Mitsubishi, collectively worth over $20 billion. In his 2023 letter to shareholders, Buffett praised these companies.
He cited their reinvesting cash to build their businesses and their modest management compensation compared to typical U.S. practices. Meanwhile, about 56% of the $337 million Aquamarine Fund, managed by Spier, is invested in U.S. stocks. These include Mastercard and Berkshire Hathaway.
But it also holds shares in global companies like Indian Energy Exchange and Chinese automaker BYD. Growth stocks are those expected to grow faster than the market in the short term. Big Tech firms, such as Apple, Nvidia, and Microsoft, are well-known growth stocks.
They make up the top constituents of the MSCI World Growth Index, which had annualized returns of 13.56% over the past decade. Value investing, as demonstrated by Warren Buffett, is a disciplined approach. It focuses on long-term gains by identifying undervalued stocks and holding them until they reach their intrinsic value.
While it may sometimes underperform growth strategies, it remains a critical part of a diversified investment portfolio.
