Value investing has been a go-to strategy for some of the world’s most successful investors, including Warren Buffett and Charlie Munger. This approach is based on buying undervalued securities and holding them long-term, betting on the market’s eventual recognition of their true worth.
“Value investing is about understanding the intrinsic value of a stock and comparing it with its market price,” Josefino Gomez, a Registered Financial Planner, told FinancialAdviser.ph “Buy when the stock is undervalued and sell when its price exceeds its intrinsic value.”
The Key Metrics: P/E and P/BV Ratios
Two common ways to evaluate whether a stock is undervalued are the Price-to-Earnings (P/E) ratio and Price-to-Book Value (P/BV) ratio.
“A P/E ratio of five means you could recoup your capital in five years, assuming earnings stay the same,” explains Gomez. “If the P/E ratio is low, it may indicate the stock is undervalued, but it’s important to compare it with industry standards and future growth prospects.”
The P/BV ratio measures the price of the stock relative to its net assets. A P/BV below 1 means the stock is selling for less than the company’s book value, a potential sign of undervaluation.
Other Strategies Value Investors Use
Aside from buying undervalued stocks, value investors employ several strategies:
Balance sheet plays – These are companies trading below the value of their net assets.
Turnarounds – Companies that have hit a rough patch but are working to regain profitability.
Special situations – Stocks whose performance depends on corporate actions like mergers, liquidations, or tender offers.
“Value investing requires patience. It’s not about chasing short-term gains,” says Gomez. “But when you find the right opportunities, the rewards can be substantial.”
Real-Life Examples of Success
Investors like Philip Carret and Walter Schloss have built enormous wealth using this strategy. Over 55 years, Carret turned $10,000 into $8 million, and Schloss, despite not attending college, beat the S&P index by 5% annually for 60 years.
Gomez himself has used value investing for over a decade, outperforming the Philippine Stock Exchange Index with a 17.5% compounded annual return from June 2011 to December 2021.
The Bottom Line
Value investing isn’t without its challenges, but the key to success lies in patience, discipline, and risk management. As Graham said, “Make the stock market your slave, not your master.” With the right mindset, value investing can consistently beat the market over the long term.
