Value Investing in Today’s Market

Value investing is a method of stock investing made famous by legendary investors such as Benjamin Graham, Warren Buffett, and Charlie Munger. This approach involves purchasing stocks that trade below their intrinsic value—the true worth of a company, which may differ from its market price. Investors calculate intrinsic value using models such as Discounted Cash Flow (DCF) or Dividend Discount Model (DDM). The former estimates the present value of a company’s future cash flows, while the latter focuses on the present value of expected future dividends.

The core principle of value investing is simple: buy stocks when they are undervalued and sell them when they reach their fair value. Over time, stock prices tend to revert to their intrinsic value, making this strategy attractive for long-term investors.

Why I Chose Value Investing

What drew me toward value investing was its logical approach—buying quality companies at a discount and holding them for long-term gains and dividend income. Compared to chasing high-priced, hyped-up stocks, value investing felt like a more conservative and disciplined strategy. However, with today’s high market valuations, the question arises: Is value investing still effective?

What Are Value Stocks?

Value stocks are shares of companies that appear undervalued based on fundamental metrics like earnings, book value, or cash flow. These stocks are often overlooked by the market due to temporary setbacks or economic downturns.

Key Characteristics of Value Stocks:

• Low Price-to-Earnings (P/E) Ratios – Trade at a lower price relative to earnings.
• Stable and Profitable Companies – Often well-established businesses with consistent earnings.
• Dividends – Many value stocks pay steady dividends, appealing to income investors.
• Defensive Nature – Tend to perform well in uncertain markets due to their stability.

Who Should Invest in Value Stocks?

• Investors seeking lower risk and steady returns.
• Dividend seekers who value passive income.
• Long-term investors looking for compounding growth over time.

What Are Growth Stocks?

Growth stocks belong to companies expected to expand revenues and earnings at a faster-than-average pace. These stocks typically reinvest profits into the business rather than paying dividends, aiming for aggressive price appreciation.

Key Characteristics of Growth Stocks:

• High Revenue & Earnings Growth – Prioritize expansion over immediate profitability.
• Higher Valuations (High P/E Ratios) – Investors pay a premium for future growth potential.
• Volatility – Prices fluctuate significantly based on earnings reports and market conditions.
• No or Low Dividends – Most growth companies reinvest earnings rather than distribute them.

Who Should Invest in Growth Stocks?

• Investors comfortable with higher risk and volatility.
• Those prioritizing capital appreciation over dividends.
• Long-term investors willing to endure market swings for potential high returns.

Value vs. Growth: Which One Wins?

Feature	Value Stocks	Growth Stocks
Price Relative to Fundamentals	Undervalued	Overvalued (high P/E, P/B, etc.)
Dividends	Often pay dividends	Rarely pay dividends
Risk	Lower risk	Higher risk
Industries	Finance, consumer staples	Tech, biotech, innovation
Investment Goal	Stability & steady returns	High growth & capital appreciation

Historically, value stocks have performed well during market downturns, while growth stocks shine in bull markets. Over the long term, both strategies have delivered solid returns.

Value Investing in the Past

Warren Buffett popularized value investing by turning Berkshire Hathaway into a powerful holding company. He has averaged an annual return of 19.87% since taking over in 1965, compared to the S&P 500’s 9% average return. While everyday investors may not replicate Buffett’s success, value stocks have traditionally outperformed growth stocks over the long term.

Figure 1: Past Performance of Value vs. Growth

Data shows that throughout the 1900s and early 2000s, value stocks outperformed growth stocks. However, this trend began shifting after the 2008 financial crisis.

Value Investing in Recent Years

Since 2008, growth stocks have significantly outperformed value stocks. The rise of tech companies and disruptive innovations has driven this shift. Figure 2 highlights the performance gap in the Russell 1000 Index since 2016, where growth stocks have tripled the returns of value stocks.

Figure 2: Performance of the Russell 1000 Growth vs. Value Since 2016 (Google Finance)

This raises an important question: Is value investing becoming obsolete?

The Future of Value Investing

Value investing thrives during market downturns when high-quality stocks become undervalued. However, trying to time the market is risky and often leads to missed opportunities. Investors who wait for a downturn may avoid short-term losses but also miss years of compounding returns. Conversely, investing in overvalued stocks can result in steep losses when prices correct.

A more adaptive approach may be beneficial—combining value investing principles with an understanding of market trends. As Warren Buffett famously said:

“I would rather buy a wonderful business at a fair price than a fair business at a wonderful price.”

Conclusion

Value investing remains a time-tested strategy, but investors must adapt to evolving market conditions. While growth stocks have dominated in recent years, value stocks still offer stability and consistent returns, especially in volatile markets. By balancing value and growth strategies, investors can position themselves for long-term success.

References

Casarella, F. (2023, August 15). Why Warren Buffett’s 19.8% Annualized Returns Remain Unmatched. Investing.com.

DiCiurcio, K., Lepigina, O., Kresnak, I., & Davis, J. (2021, April). Value versus growth stocks: The coming reversal of fortunes. Vanguard. Retrieved March 3, 2025, from https://www.vanguard.co.uk/content/dam/intl/europe/documents/en/value-versus-growth-stocks-uk-en-pro.pdf

Google Finance. (n.d.). Russell 1000 Value Index (RLV) and Russell 1000 Growth Index (RLG) Comparison. Google. Retrieved March 3, 2025, from https://www.google.com/finance/quote/RLV:INDEXRUSSELL?window=MAX&comparison=INDEXRUSSELL%3ARLG

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