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What is value investing — how Warren Buffett made his money?
Warren Buffett has long been a proponent of value investing — and those principles have helped him amass a personal fortune of around $150 billion . It’s an investing approach that means taking the long view, holding your nerve and avoiding risky behavior — philosophies Buffett learned from economist Benjamin Graham’s 1949 book, “The Intelligent Investor.” So what exactly is value investing, and how does it work? What is value investing? The short answer is that value investing refers to buying a stock that is trading below its intrinsic value, according to investor Guy Spier, a self-proclaimed ” disciple ” of Buffett’s. “What many people would call a value stock is something that is cheap by some objective measure, like price-to-book ratio or price-to-earnings ratio,” Spier told CNBC via a video message. A price-to-book (P/B) ratio below 1 can mean a stock is undervalued as it 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, meanwhile — which measures share price relative to earnings per share — suggests a stock’s price is low compared to a company’s earnings. Like many investment approaches, value investing is all about figuring out how much a stock might be worth in the future. But value investors also often take a contrarian approach, targeting stocks they think the market is missing out on. This is why value investors have to be “highly rational,” according to Spier. You have to be able to “get control of your own behavior” when the rest of the market appears to be moved by emotion or driven by short-term aims, he said. Buffett has warned against risky behavior or being “jealous” when another investor does well, and also said he looks to companies that are “operated by honest and competent people.” Holding stocks for a ‘long, long, long time’ Value investors aim to hold stocks until they reach what they calculate to be a price that reflects their intrinsic value — which can take years. “What counts is buying a good business at a decent price, and then forgetting about it for a long, long, long time,” Spier said. Buffett has said his ideal holding period is “forever,” although value investors usually sell stocks when they’ve reached the price they think they are worth. This long-term holding strategy means value investors are less concerned about factors that affect the market in the shorter term, such as conflicts or political events. Bill Nygren, a value investor who manages the $23 billion Oakmark Fund , said U.S. President Donald Trump’s election victory is unlikely to impact what Oakmark will buy this quarter, for example. Nygren looks at factors such as how much an industry is going to grow, the cashflow a company has, and how it will deploy it over a seven-year period. “That affects the estimate of business value much more than trying to tweak the next couple years of earnings based on whether tariffs are higher or lower, or tax rates are a little bit higher or lower,” Nygren told CNBC in a video call. Examples of value stocks — and how they’ve performed The MSCI World Value Index is made up of large and mid-cap companies from 23 countries. Its largest constituents are in sectors including financials — like JPMorgan and Bank of America — and healthcare, such as Johnson & Johnson and pharmaceutical company AbbVie . The index’s second-biggest constituent is Berkshire Hathaway — Warren Buffett’s holding company. But the MSCI World Value Index has underperformed the market as a whole over the past decade. In the 10 years to Jan. 31, 2025, the MSCI World Value Index logged annualized returns of 8.26%, while the tech-heavy MSCI World Growth Index returned 13.56% over the same period. Sam Ziff, chief investment officer at value investment firm Oldfield Partners, pointed to two stocks that have exemplified the value investment strategy for him over the past 20 years. The first is insurance company Chubb . Ziff said the company has generated an “unmatched” average combined ratio, which measures an insurer’s premiums collected versus the amount paid out in claims. In the third quarter, the insurer reported a combined ratio of 87.7%. A figure below 100% is a sign of profitability. Some insurers “chase the cash they get paid by premiums and worry about the consequences later,” but Chubb has a longer-term focus, Ziff said in an email to CNBC. The second example Ziff gave is Swedish bank Handelsbanken , which he said has been “conservatively managed,” and has a long-term approach. It has an “attractive” valuation, Ziff said, trading at a lower P/E ratio than banks such as Wells Fargo and Bank of America , while its dividend yield is more than 10%. Value investing in the U.S. and beyond If you’re interested in value investing, you might want to look beyond the U.S. which looks “expensive” as 2025 gets underway, according to Morningstar . Philip Straehl, Morningstar’s head of capital markets and asset allocation for North America, highlighted opportunities in U.K. homebuilder stocks — which he said could rise by 50% — and European autos, where he said there are “huge discounts” to be found. Most of Buffett’s investments via Berkshire Hathaway are in U.S. companies, with Apple , American Express and Bank of America its top constituents . But Berkshire also owns significant stakes in companies outside the U.S., such as in Japanese trading houses Itochu , Mitsubishi , Mitsui and Sumitomo and Marubeni , collectively worth over $20 billion. In his 2023 letter to shareholders , Buffett said he likes these companies for retaining cash to “build their many businesses” and because their management is “far less aggressive about their own compensation than is typical in the United States.” Meanwhile, about 56% of the $337 million Aquamarine Fund, which Spier runs, is invested in U.S. stocks, including Mastercard , American Express and — of course — Berkshire Hathaway. But it also owns global shares, including Indian Energy Exchange and Chinese automaker BYD . Value versus growth Growth stocks are typically those that investors think will grow faster than the rest of the market in the short term. Big Tech firms are among the most well-known growth stocks, with Apple, Nvidia and Microsoft making up the top three constituents of the MSCI World Growth Index . The index’s annualized returns of 13.56% in the 10 years to Jan. 31, 2025 means it has outperformed the MSCI World Value Index by more than 5 percentage points. Over 50 years, however, value stocks have slightly outperformed, with the MSCI World Value Index beating the MSCI World Growth Index by around 1 percentage point. Yet the distinction between value and growth isn’t always clear-cut. Nygren said there’s a “general impression that value investing is the opposite of growth,” but the idea that growth investors buy “really good” companies and “value managers kind of buy the leftovers” is a myth. “The biggest distinction is that value managers are willing to buy almost anything if the price is right,” Nygren added. “That includes companies that you’d be stretching to say are average businesses … We own General Motors at five times earnings. We own Citigroup at six times what we expect them to earn in another year,” he said. The market is valuing these companies at a much larger discount than his firm thinks is warranted, Nygren added. On the other hand, Oakmark owns shares in Alphabet and Salesforce , which are often considered growth stocks. These are “well above average companies, but we think they’re being priced like average businesses,” Nygren said. Risks and downsides of value investing Value investing isn’t for everyone, according to Nygren. You need to have a personality that aligns with its principles, he said, “because it’s so hard to maintain your conviction in something where the market is taking a longer time to come around to your point of view.” His advice is to consider your buying habits in general. “If your personality is you’re happy paying retail price for Chanel, maybe value investing isn’t consistent with your personality,” he said. Spier’s advice is to beware of the “value trap.” There are many stocks that look cheap, he said, but there might be a hidden reason why. The Aquamarine Fund owns shares in Seritage , a real estate investment trust (REIT) which was spun out of retailer Sears in 2015. Spier said he bought the stock because he thought the properties were worth “a lot,” but rising interest rates and the popularity of online shopping mean his investment has been “hollowed out.” “So there’s a stock that looked cheap for me, and it’s gotten a lot cheaper,” Spier said. There are also now “a lot” of people investing in this way, he added, which creates more competition in the market. Value opportunities Looking ahead, Spier likes Indian credit ratings firm Care Ratings for its potential to compete with U.S. companies like Moody’s in five to 20 years. “I find it interesting to look at ways in which the financial system and the global economy will be reset and rebalanced when, for example, the largest English-speaking economy is not the United States, but actually India,” he said. For Nygren, the “best opportunities are always those that are being ignored by the rest of the market,” with “good opportunities” in traditional oil and gas and automotive companies. It’s “wrong” that the world is going to stop relying on fossil fuels any time soon, Nygren said. “The companies are priced cheaply enough that if that takes a couple of decades to happen, the stocks could still be good investments,” he said. Similarly, he sees the market’s excitement about electric vehicles as overblown. EVs are “just not practical” for driving long distances in the U.S., Nygren said, naming General Motors as a “very attractive” alternative. Financial firms make up around 38% of Nygren’s Oakmark Fund, including Wells Fargo, payments company Fiserv and investment firm Charles Schwab . The sector is now managed much better than it was during the 2008-2009 financial crisis, he said, which investors are “still scarred by.” Banks “look at growth on a per-share basis, so when they’re generating a lot of capital, instead of trying to get bigger, they’re returning it to shareholders,” he said. Ziff, meanwhile, said that Oldfield Partners is mostly focused on value investing opportunities outside the U.S. He named drinks firm Heineken as a “best-in-class” beer brand, and European steel company Arcelor Mittal as “trading at an extraordinary discount.” – CNBC’s Yun Li contributed to this report.
Warren Buffett walks the floor ahead of the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska on May 3, 2024.
David A. Grogen | CNBC
Warren Buffett has long been a proponent of value investing — and those principles have helped him amass a personal fortune of around $150 billion.
It’s an investing approach that means taking the long view, holding your nerve and avoiding risky behavior — philosophies Buffett learned from economist Benjamin Graham’s 1949 book, “The Intelligent Investor.”
So what exactly is value investing, and how does it work?
