Warren Buffett has long been a proponent of value investing, which has helped him amass a personal fortune of around $150 billion. This approach emphasizes taking the long view, holding one’s nerve, and avoiding risky behavior.
Buffett learned these philosophies 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, a notable investor and follower of Buffett, describes a value stock as something considered cheap by objective measures such as price-to-book ratio or price-to-earnings ratio. A price-to-book (P/B) ratio below 1 indicates that if a company’s assets were sold, they would be worth more than the value of its shares.
A low price-to-earnings (P/E) ratio suggests a stock’s price is low compared to a company’s earnings. Value investors often take a contrarian approach, targeting stocks they believe the market has undervalued. This requires high rationality and control over one’s behavior, especially when the market seems driven by emotion or short-term goals.
Buffett has warned against risky behavior and emphasizes investing in companies operated by honest and competent people. Value investors aim to hold stocks until they reach their intrinsic value. This process can take years.
Buffett’s principles on value investing
Spier points out that the key is to buy a good business at a decent price and then forget about it for a long time. Buffett said his ideal holding period was “forever,” although value investors usually sell stocks once they believe they have reached their intrinsic value.
This long-term strategy means value investors are less concerned with short-term market fluctuations. Bill Nygren, a value investor managing the $23 billion Oakmark Fund, notes that factors like industry growth and company cash flow over extended periods are more crucial than short-term political or economic events. The MSCI World Value Index comprises large and mid-cap companies from 23 countries, including financial institutions like JPMorgan and Bank of America, as well as healthcare giants like Johnson & Johnson and AbbVie.
Berkshire Hathaway, Buffett’s holding company, is the index’s second-biggest constituent. However, this index has underperformed the market over the past decade. For the ten years ending January 31, 2025, the MSCI World Value Index logged annualized returns of 8.26%, compared to the MSCI World Growth Index’s 13.56%.
While most of Buffett’s investments through Berkshire Hathaway are in U.S. companies, he also holds significant stakes in firms outside the U.S., such as Japanese trading houses Itochu, Mitsubishi, Mitsui, and Sumitomo. Morningstar’s Philip Straehl suggests looking beyond the U.S. for value investing opportunities, highlighting the U.K. homebuilder stocks and European automotive sectors as promising prospects. In conclusion, value investing involves purchasing undervalued stocks, holding them long-term, and focusing on intrinsic value rather than short-term market conditions.
This strategy, as demonstrated by Warren Buffett, can lead to significant financial gains over time.
