What is Value Investing? The Ultimate Philosophy Followed by Buffett

Value Investing 2025-12-20

What is Value Investing?

Value investing is an investment strategy that emphasizes buying assets at prices below their intrinsic value and holding them for the long term to achieve excess returns. The core idea of value investing is: Mr. Market makes mistakes, asset prices deviate from their intrinsic value, and smart investors can profit from this deviation.

Three Core Principles of Value Investing

1. Margin of Safety

The margin of safety is the cornerstone of value investing, referring to the gap between an asset's intrinsic value and its current market price. Buffett once said: "The first rule of investing is not to lose money, and the second rule is never to forget the first rule." The margin of safety provides a buffer for investors against market volatility and uncertainty.

2. Business Ownership

Value investors see themselves as owners of businesses, not traders of stocks. They deeply research a company's financial condition, business model, moat, and management team to find high-quality enterprises with long-term competitiveness.

3. Mr. Market

Mr. Market is a famous metaphor proposed by Graham to describe market sentiment fluctuations. Mr. Market is sometimes optimistic, pushing prices up; sometimes pessimistic, pushing prices down. Value investors are not swayed by Mr. Market's emotions but use Mr. Market's mistakes to buy and sell stocks.

Representative Figures of Value Investing

Benjamin Graham

Known as the "Father of Value Investing," he authored "Security Analysis" and "The Intelligent Investor," laying the theoretical foundation for value investing.

Warren Buffett

A student of Graham, known as the "Oracle of Omaha," he is the most successful practitioner of value investing. Through Berkshire Hathaway, he created a miracle of long-term compound annual returns exceeding 20%.

Charlie Munger

Buffett's long-term partner, he emphasized "buying great companies at reasonable prices rather than mediocre companies at cheap prices," expanding the connotation of value investing.

Suitable Groups for Value Investing

  • Investors who are patient and can hold for the long term
  • Investors who are willing to spend time researching company fundamentals
  • Investors who can think independently and not follow the crowd
  • Investors who pursue long-term stable returns rather than short-term speculation

Advantages and Disadvantages of Value Investing

Advantages

  • Relatively low risk, protected by margin of safety
  • Stable and reliable long-term returns
  • Conforms to business logic, easy to understand
  • Can avoid costs and taxes from frequent trading

Disadvantages

  • Requires a lot of time to research company fundamentals
  • May underperform during market bubbles
  • Uncertainty in the timing of value regression
  • Requires strong psychological qualities to withstand market volatility

Practical Steps of Value Investing

  1. Screen High-Quality Enterprises: Use financial indicators to screen enterprises with good profitability and financial health
  2. In-depth Research and Analysis: Research the company's business model, competitive advantages, management team, and industry prospects
  3. Evaluate Intrinsic Value: Use discounted cash flow models, P/E ratio, P/B ratio, etc. to evaluate the company's intrinsic value
  4. Wait for Appropriate Price: Buy when the market price is below the intrinsic value by a certain margin (margin of safety)
  5. Long-term Holding: Hold until the company's value is fully reflected or the fundamentals change
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