Value investing is the strategy of buying stocks that trade below their intrinsic value. It was pioneered by Benjamin Graham and made famous by Warren Buffett.
What Is a Value Stock?
| Characteristic | Value Stock | Growth Stock |
|---|
| P/E ratio | Low (8-15) | High (25-100+) |
| P/B ratio | Low (< 2) | High (5+) |
| Dividend yield | 2-6% | 0-2% |
| Earnings growth | 5-10% | 15%+ |
| Market sentiment | Out of favour | Popular |
| Sector | Traditional (utilities, finance, industrials) | Tech, biotech |
The Core Principles
| Principle | Explanation |
|---|
| Margin of safety | Buy at a significant discount to intrinsic value |
| Moat | Invest in companies with durable competitive advantages |
| Patience | Value can take years to be recognised |
| Contrarian | Buy when others are selling |
| Focus on the business | Understand what you own |
Key Metrics
| Metric | Formula | Good Value |
|---|
| P/E (Price to Earnings) | Price / EPS | < 15 |
| P/B (Price to Book) | Price / Book value | < 1.5 |
| P/S (Price to Sales) | Price / Revenue per share | < 2 |
| Dividend yield | Annual dividend / Price | 3%+ |
| Debt/Equity | Total debt / Equity | < 1 |
| ROE | Net income / Equity | 15%+ over time |
How to Find Value Stocks
Screening Criteria
| Screen | Reason |
|---|
| P/E < 15 | Not overpriced |
| P/B < 1.5 | Below book value |
| Dividend yield > 2% | Returns value to shareholders |
| 5+ years of profitability | Established business |
| Low debt | Can survive downturns |
Where to Look
| Market | Typical Value Sectors |
|---|
| FTSE 100 | Banks, oil & gas, utilities |
| S&P 500 | Financials, healthcare, consumer staples |
| Emerging markets | Often trade at value multiples |
The Margin of Safety
The margin of safety is the difference between a stock’s price and your estimate of its intrinsic value.
| Estimated Intrinsic Value | Current Price | Margin of Safety |
|---|
| £100 | £70 | 30% |
| £100 | £50 | 50% |
| £100 | £90 | 10% |
Aim for at least 30% margin of safety to account for errors in your analysis.
Value Investing Traps
| Trap | How to Avoid |
|---|
| Value trap (stock is cheap but never recovers) | Check for genuine competitive advantage |
| Cyclical at peak earnings | Look at average earnings over 5+ years |
| Deteriorating business | Check debt levels and revenue trends |
| Ignoring management | Research management quality and incentives |
| Confirmation bias | Look for reasons the stock might be cheap for good reason |
Famous Value Investors
| Investor | Strategy |
|---|
| Warren Buffett | Quality businesses at fair prices |
| Benjamin Graham | Deep value (net-net, cigar butts) |
| Seth Klarman | Deep value with catalysts |
| Howard Marks | Opportunistic, cyclical value |
Value Investing in 2026
Value investing has underperformed growth since 2008. But value historically outperforms in:
- Rising interest rate environments
- Post-recession periods
- High inflation periods
- When growth stock valuations are extreme
Bottom Line
Value investing requires patience and contrarian thinking. Use P/E, P/B, and dividend yield to find candidates. Look for a 30%+ margin of safety. Avoid value traps by checking for real competitive advantages. Value investing works over the long term but can underperform growth for years. That patience is the hardest — and most important — part.
This content is for educational purposes only. Not financial advice. Do your own research before investing.