What is Value Investing?
Value investing is an investment strategy followed by legends like Warren Buffett. Here's how it works.
What is value investing?
Value investing is one of the most enduring investment strategies – and it’s the playbook followed by legends like Warren Buffett. At its heart, it’s about finding great businesses at bargain prices and letting time do the wealth compounding.
The basic definition of value investing is about buying stocks for less than they’re really worth. Instead of chasing hype, it’s a strategy built on patience, discipline, and spotting undervalued businesses with long-term potential.
Value investors tune out market noise, instead zooming in on the fundamentals and asking: is this company genuinely undervalued compared to its true long-term worth?
If the answer is yes, they buy in while it’s cheap.
🎓 Learn more: How to tell if a stock is undervalued or overvalued?→
What are the foundations of value investing?
At its core, value investing comes down to four main ideas:
Intrinsic value: This is what a company is really worth, based on its future cash-generating ability. The classic way to estimate it is discounted cash flow (DCF) – projecting future earnings and adjusting them back to today’s dollars.
Margin of safety: The golden rule of Benjamin Graham, the father of value investing, professor at Columbia Business School and mentor to Warren Buffett. His book The Intelligent Investor is still considered essential reading today. The principle: only buy when there’s a big gap between the price and intrinsic value, so even if you’re wrong, your downside is limited.
Numbers vs judgement: Graham focused almost entirely on ratios and book value. Buffett, his most famous student, evolved the approach by adding a layer of judgement, looking for great businesses at fair prices rather than just cheap ones.
Patience pays: Markets can take months or years to reflect a company’s true value. The biggest edge for value investors isn’t speed - it’s the discipline to hold when others get restless.
🎓 Learn more: How to research stocks?→
How can you find and judge value in a stock?
The first step for any value investor is digging into a company’s reports. This is where you get the hard facts about a business’s performance, without the market noise.
In the U.S., that means the company’s 10-Q quarterly earnings and 10-K filing (the annual report) found on the Securities and Exchange Commission website or on the company’s investor relations page.
In Australia, it’s the company’s half-yearly and annual earnings reports, often found on the ASX website or the company’s own investor relations page.
These documents might look intimidating, but they’re the source of truth about a company’s financial health. Here’s what value investors usually focus on:
Income statement: shows the revenue a company brought in, what it spent, and how much profit is left.
Balance sheet: a snapshot of what the company owns and what it owes.
Cash flow statement: tracks actual cash coming in and out.
Footnotes and management discussion: often contain the most important clues about the earnings outlook.
Management earnings guidance: compare forecasts on future revenue, profit, or margin expectations.
Comparisons over time: value investors compare data across 3–5 years to spot trends.
What are the key ratios in value investing?
Spotting undervalued companies means looking beyond the share price. Value investors rely on a handful of key ratios to measure whether a stock is cheap, fairly priced, or a potential trap.
Here are the big ones to know:
Metric | What it means | Why it matters | Example |
|---|---|---|---|
P/E (Price to Earnings) | Share price compared to earnings per share (EPS). Learn more about understanding what a good P/E ratio is. | Shows how much investors are paying per $1 of earnings. | A stock at $20 with EPS of $2 = a P/E of 10x. You’re paying 10 years’ worth of earnings. |
P/FCF (Price to Free Cash Flow) | Market cap vs. free cash flow (or cash left after capital expenditures) | Cash is harder to manipulate than earnings. | Market cap $5b ÷ free cash flow of $500M = 10x. Every $10 in value spins off $1 in cash. |
PEG (Price Earnings Growth Rate) | P/E ÷ expected earnings growth. | Helps judge if a stock’s growth is already priced in. Less than 1 can mean cheap growth. | P/E 10x ÷ growth 20% = PEG ratio of 0.5. This suggests the market is not pricing in growth. |
ROE (Return on Equity) | Net profit ÷ shareholder equity. | Measures management effectiveness in putting investor money to work. | Net profit of $200m ÷ $1b equity = ROE of 20%. |
P/B (Price to Book ratio) | Market value compared to net assets (ex intangibles). | Less than 1 may signal undervalued assets. | Market cap of $800m ÷ net assets of $1.2B = P/B of 0.67x. |
Current ratio | Current assets ÷ current liabilities. | Gauges short term solvency. Greater than 1 is usually healthy. | Assets of $1.5b ÷ liabilities of $1b = 1.5x. |
Quick ratio | (Cash + receivables) ÷ liabilities. | A stricter version of the current ratio that excludes inventories. | Quick assets of $900m ÷ liabilities of $1b = 0.9x. |
Debt to equity | Total liabilities ÷ shareholder equity. | Gauges financial risk. High ratios mean higher leverage. | Liabilities of $2b ÷ equity of $1b = 2x. |
How does Warren Buffett apply value investing?
Warren Buffett took Benjamin Graham’s playbook for value investing and made it his own.
While Graham stuck closely to ratios and balance sheets, Buffett added a layer of judgment. He looks for companies with durable competitive advantages: businesses that have a ‘moat’ around them.
That means things like:
Large customer base, such as American Express ($AXP), Kroger ($KR)
Pricing power: the ability to raise prices without losing customers
High barriers to entry: hard for rivals to muscle in
Buffett is willing to pay a fair price for a great business, rather than a bargain price for an average one. This approach transformed Berkshire Hathaway into one of the most successful investment companies in history.
Think of it this way: Graham bought what was on sale. Buffett buys what’s built to last. And both only work if you’ve got the patience to wait for the market to notice.
💡Related: Renowned value investor, Warren Buffett and his holdings→
What are some real life value investing examples from Warren Buffett?
One of Buffett’s best-known early wins was American Express in the 1960s. After the Salad Oil Scandal broke, the stock plunged roughly 40% as investors panicked. The Oracle of Omaha dug into the business and concluded that the brand, cardholder loyalty, and merchant acceptance were intact.
He built a large position while sentiment was darkest and held as confidence – and the share price – recovered over the following years: a textbook value play built on durable competitive advantages rather than short-term headlines.
In August 2025, Berkshire invested about US$1.6b in UnitedHealth ($UNH) as regulatory scrutiny, C-suite turmoil and rising costs hit the stock. Buffett’s view: its scale as the world’s largest private health insurer, cash flow, and respected new leadership should drive recovery and long-term compounding.
Berkshire Hathaway also invested US$1.2b in Constellation Brands ($STZ) near five-year lows and then doubled its stake in 2025, banking on the enduring power of beer brands like Modelo and Corona, plus steady cash generation and shareholder-friendly buybacks.
What are the traps and pitfalls of value investing?
Value investing isn’t risk-free. The biggest danger is the value trap – a stock that looks cheap but stays that way because the business is in decline.
Risks to consider:
Industry disruption: whole industries can shrink, such as legacy media losing out to streaming and social media
Poor management: bad capital decisions can erode value.
Debt: heavy leverage can sink even solid businesses in tough markets.
Slow turnarounds: undervalued stocks may take years to recover.
External shocks: regulation, interest rates, or recessions can derail a rebound.
Bottom line: not every low P/E is a bargain. Discipline and scepticism are essential.
What is the difference between value investing and growth investing?
These are often seen as competing styles by investors but they do sometimes overlap.
Growth investing targets companies expected to outpace the market. Often tech names or disruptors with high revenue growth but little profit –(think Tesla or early Amazon. They usually trade at higher multiples because investors are paying up for future potential. The upside can be huge, but so can the volatility if growth slows.
Value investing looks for established businesses trading below their true worth. Often found in industries with steady cash flows: banks, insurers, consumer goods and healthcare. Instead of betting on explosive growth, the focus is on buying quality at a discount and letting time close the gap between price and value.
Where they overlap. The line isn’t always clean. A growth company that stumbles might eventually become a value play if its stock falls enough. Or a value stock with strong fundamentals can turn into a growth winner once the market recognises its potential.
Value investing isn’t about being flashy. It’s about patience, discipline and stacking the odds in your favour by paying less than a business is worth.
This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.
More resources:
✅ Is passive or active investing right for you?→
✅ Should you try a core-satellite investing strategy?→
✅ How to invest $5,000 in Australia today→
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Value investing FAQs
Buying at a discount can give you a margin of safety and more upside when the market re-prices the stock.
Learn about some of the top value stocks on the ASX.
Yes. It’s patient, typically lower-risk, and not tied to chasing market hype.
Yes. Buffett’s recent bets on UnitedHealth and Constellation Brands prove its enduring appeal.
Samy is a markets analyst at Stake, with seven years of experience in the world of investing, working across roles in private banking, venture capital and financial media. She has a Master’s degree in Finance and Data Analytics from The University of Sydney Business School.
