What is value investing?

Finding businesses that are worth more than their price indicates is the foundation of value investing, which has many different applications

When you first begin investing, value investing is probably one of the first ideas you'll come across. Like many other investment terms, "value" is difficult to define exactly.

"All investment is value investment, in the sense that you're always trying to get better prospects than you're paying for," said Charlie Munger, the business partner of the renowned US investor Warren Buffett. It's true, but it's not very useful. Let's be more precise now.

Those who invest in value seek out stable businesses that are undervalued.

Nisha Thakrar, a product specialist at Nedgroup Investments who works on the Contrarian Value Equity Fund, says, "We frequently use the term durable businesses." "We're looking for businesses that will last forever.

The group chooses from a list of about 500 stocks that, in light of their long-term prospects, they believe are worthwhile investments; however, the decision to buy or sell any stock on this longlist is contingent upon its current value.

Value investing is making a comeback, despite having been out of favor for a large portion of the 2008present period. What steps must one take in order to become a value investor?

What is the process behind value investing?

Numerous value investors base their choices on determining a stock's intrinsic value, and they seek to purchase stocks that are trading below this value, frequently taking a margin of safety into consideration as an additional safety net. Investors who want a 30 percent margin of safety will only purchase a stock that is valued at 2 if its price drops to 1 point 40 or less.

If there were a single method for defining or calculating intrinsic value, the stock market would be far less dynamic. As a result, various value investors will employ distinct strategies. For instance, the Contrarian Value Equity team at Nedgroup examines a company's growth trajectory over the next three to five years and looks for evidence that it can produce annualized returns of 810 percent during that time.

Value investors have one thing in common: their strategy will be founded on the company's fundamentals, which is, in general, the price at which a stock trades in relation to the amount of money the company makes (or, in some cases, is on course to make). The majority of value investors also closely examine the balance sheets of businesses.

Thakrar states, "The obvious questions are what is the strength of the balance sheet, are these cash-rich companies, are they indebted, what is the business structure, and what are the main sources of revenue and how diversified are those".

What distinguishes value investing from growth investing?

Growth or momentum investors, on the other hand, are generally less concerned with fundamentals and more with market sentiment and narrative. Regardless of the stocks' current profitability (if any), they want to purchase those that are rising in value and are probably going to continue to do so for a very long time. Value investors will typically avoid companies that have room to grow because they are typically valued at a significant premium.

Nevertheless, there are overlaps between these styles, and as Munger states, all investing is, in some ways, value investing. Growth investors purchase growth stocks because they believe they are inexpensive in relation to their long-term worth. They may study basic indicators such as the forward price:earnings ratio (forward P/E), which divides a company's price by the profits analysts predict it will generate over the course of the next 12 months.

Value investors may agree with growth investors that certain stocks make appealing long-term investments at their current price, and they are also aware that good companies grow over time.

Instead of viewing these two labels as complete opposites, it may be useful to consider them as distinct viewpoints or methods for addressing the same issuenamely, attempting to determine where to put your money.

What is investing the opposite way?

Contrarian and value investing are similar in that they both look for businesses that the market has undervalued. However, each approaches it in a slightly different manner.

Value investors search for stable, dependable companies by examining their fundamentals. Conversely, contrarians actively target businesses that are being overlooked for various reasons.

Consider Alphabet, the parent company of Google (NASDAQ:GOOGL). The Magnificent Seven are a group of large tech megacap stocks that many investors think are overpriced. Alphabet's price is more than 30 times its trailing earnings. It is as far as a conventional value stock can go in certain ways.

But as of December 31, it held 7:5% of the portfolio, making it the largest holding in Nedgroup's Contrarian Value fund. The secret to success for contrarian investors, according to Thakrar, is to purchase stocks when the market ignores them.

"We acquired Alphabet in 2011, when it was most likely still known as Google," she says. The decision to switch from desktop to mobile computing posed an existential threat to Google at the time. Nedgroup purchased the stock due to its strong balance sheet, resilient ad-revenue business, deep moat, and outstanding management team.

"Since then, the company has diversified into a number of revenue-generating activities outside of its primary search business, which are significantly contributing to growth," Thakrar stated.

Although the market wrote off Google at the time, it now appears to have been a mistake. The investment in Nedgroup has grown seventeen times.

In addition, contrarians will try to get into a market when most investors are avoiding it in the hopes of buying low and selling high when sentiment improves.

What dangers come with value investing?

Value investors face two significant risks. One is that they purchase businesses that are cheap for a reasonfor instance, because new technology has destroyed their business modeland that will never regain their former glory. The term "value traps" refers to these. Only because the rest of the market has already realized that their business is in decline are they offering low prices.

The apocryphal quote from John Maynard Keynes, the most well-known economist of the 20th century and a skilled investor, encapsulates the second risk. The market can continue to be irrational for a longer period of time than you can stay solvent, according to Keynes.

Put differently, even high-quality value stocks can experience periods of underperformance that keep them out of favor longer than the typical investor can hold onto them. This emphasizes patience, which is the most crucial quality for a value investor.

When Michael Burry, the renowned contrarian investor, wrote to his investors in October 2025 to inform them that he was closing his hedge fund Scion Asset Management, he evidently ran out of patience.

Burry stated, "My assessment of the value of securities is not, and has not been, in line with the markets for a while."

Value investing is difficult, even for experts. When they first start investing, novice investors might want to stick to funds designed for beginners. However, once you gain some confidence, examining the company's fundamentals can be a profitable method of selecting which stocks to purchase.

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