Value Investing: Thinking Against the Grain

Value investing might not be the most popular term in the financial world today, but it remains one of the most influential and time-tested strategies in investing. This approach originated in the early twentieth century at Columbia Business School in New York, where Benjamin Graham and David Dodd developed the philosophy that later became globally renowned. Graham, often called the “father of value investing,” laid the foundation for selecting stocks based on their fundamental value—not just price and market sentiment.

One of his best-known students, Warren Buffett, built his entire career on these principles, becoming one of the wealthiest and most successful investors in the world. Buffett demonstrated that value-based investing, when applied with discipline and patience, can generate above-average long-term returns.

Value investing contradicts the prevailing economic theory that markets are always efficient. According to this “efficient market theory,” a stock's price always accurately reflects its underlying value. But reality is messier. Investors are people, not machines. They’re influenced by emotions, headlines, trends, algorithms, and herd behavior. As a result, there are regular moments when a stock’s price deviates significantly from its true economic value. That’s where value investing comes into play.

To recognize and exploit this price-value gap, an investor needs an edge—something that can arise in three ways. First, through an informational advantage: access to data the broader market hasn’t fully processed. Second, through analytical advantage: better insight or deeper interpretation of existing information. And third, through a structural advantage, such as lower trading costs or a longer investment horizon than the average market participant. When one of these three factors is present, inefficiency emerges—and thus, an opportunity for the active investor.

Today, index investing is more popular than ever. It’s accessible, inexpensive, and promises average market returns at minimal cost. But it completely ignores the essence of value investing. Index funds automatically buy the largest companies based on market capitalization, without regard for valuation or fundamental analysis. As more capital flows into passive investments, pricing in the markets becomes increasingly driven by supply and demand rather than intrinsic value. Ironically, this makes the markets less efficient—and creates even more opportunities for value investing.

That’s why selecting companies based on fundamental value, using a disciplined approach, deep analysis, and patient timing, remains a meaningful strategy for those seeking alpha: returns above the market average. A well-structured portfolio led by managers who adhere to these principles can still make a significant difference.

Disclaimer

This article has been prepared with the greatest possible care and is intended for informational purposes only. It is not tailored to your individual situation and should not be regarded as investment advice, an offer, or a recommendation to buy or sell any financial instruments. Investing involves risks, including possible loss of capital. Past performance is no guarantee of future results.