What is Value Investing? Understanding Warren Buffett's Strategy
- Guilherme Ticianeli
- Mar 30
- 3 min read
Updated: Apr 2
Value investing is an investment strategy popularized by legendary investor Warren Buffett. It seeks out undervalued stocks in the market, and is the reason for many investors’ long-term financial success. But what exactly is value investing, and how can you apply it the way the 94-year-old billionaire did?
What is Value Investing?
The idea of value investing is to buy assets at a discount and hold them until the financial market corrects the mispricing. The creator of this method, which was later refined by Buffett, was the British economist Benjamin Graham.
The analysis carried out in this strategy is individual and varies from person to person. However, there are fundamental principles that help investors choose the right companies to invest in:
Security Analysis – Assessing a company’s financial health, including its earnings, revenues, and debt levels, and then buying its undervalued shares.
Long-term focus – Investing in companies with solid fundamentals, rather than following short-term trends.
Margin of safety – Buying shares at a price below their intrinsic value to reduce risk.
Warren Buffett's Investment Philosophy
Over the years, the billionaire learned value investing from Graham at Columbia Business School and expanded his fortune by following the principles of this strategy. A great example of this is that he always invested in companies he understood and was confident in their growth potential.
Buffett invested long-term and focused on companies with solid fundamentals, transforming many businesses. One notable example is Berkshire Hathaway, which became one of the largest companies in the world under his leadership.
If an investor wants to implement value investing as a strategy, they need to identify with the company in some way to understand and evaluate its future potential.
How to Apply Value Investing:
After studying, understanding the company, and analyzing its fundamentals, as well as recognizing the importance of long-term investment, the next steps for the investor to apply value investing are:
Calculating Intrinsic Value
A stock's intrinsic value is the true worth of a company based on discounted future cash flows, which represent expected earnings. Buffett uses discounted cash flow (DCF) models to calculate this value, and it is the most recommended approach.
Diversify Investments
Buffett is an advocate of concentrating investments on the best opportunities, but he also recognizes that some level of diversification is necessary to reduce risk. Given this, the recommendation is to diversify into high-quality companies, but the investor should be careful not to overload their portfolio with too many stocks. Holding five to ten strong assets is enough for most investors.
Monitor and Regularly Reassess
Value investing doesn’t mean buying and forgetting. Even after purchasing stocks, it’s crucial to monitor the companies and ensure they continue to have solid fundamentals. If a company experiences significant changes in its fundamentals, or if its stock price deviates too far from its intrinsic value, it may be necessary to adjust your strategy.
The Bottomline
Value investing is a strategy that requires discipline, patience, and a detailed analysis of the chosen company.
This is a time-tested method known for its effectiveness when executed properly, and it’s no coincidence that investors like Buffett and Graham have achieved considerable profits.
The secret to significant profit is identifying undervalued companies with long-term growth potential. It’s always important to emphasize the importance of purchasing these stocks with a margin of safety, thus avoiding significant damage to the investor’s portfolio in case the investment does not perform as expected.
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