Many trends in investing seem to come and go, but to us value investing is a philosophy that has stood the test of time. Pioneered by Benjamin Graham in his seminal works Security Analysis (1940) and The Intelligent Investor (1949),1 value investing reached its peak with Graham’s most famous student, the Oracle of Omaha, Warren Buffet.
But does this classic strategy still hold up in an era of algorithmic trading and instant access to information?
The answer is: potentially yes. Let’s look at some core lessons from the legends and see how they might be applied in today’s market.
Often called the "father of value investing," Benjamin Graham laid out his revolutionary strategy in Security Analysis and The Intelligent Investor. His foundational principle was simple yet profound: Buy a stock for less than its intrinsic value. Graham believed that the market often misprices securities in the short term, creating opportunities for discerning investors.
His philosophy rested on two key concepts:
1. Mr. Market
Graham introduced an imaginary investor called Mr. Market, a mood-swinging character who approached every investment through the lens of his mood.2 During his optimistic periods, Mr. Market is seized by euphoria and is willing to buy shares at ridiculously high prices. When his spirits tank, he grows despondent and is willing to sell at absurdly low prices. The market as a whole can follow these mood swings.
The lesson? Don’t be like Mr. Market. Graham’s "Intelligent Investor" is not swayed by emotion. This clever investor can use Mr. Market’s pessimism to their advantage by aiming to buy low and take advantage of others' euphoria to sell at attractive levels. Graham believed that we should treat market prices as an opportunity, and not a reflection of a company's true worth.
2. Margin of safety
This is perhaps Graham's most important contribution to investing. The margin of safety is the difference between a company's intrinsic value and the price an investor pays for its stock. The wider this margin, the more room for analytical analysis or unforeseen negative events. An investor can establish a margin of safety they are comfortable with as a potential way to manage downside risk. It’s a buffer against the inevitable uncertainties of the future. Buying a dollar's worth of assets for 50 cents provides a substantial margin of safety.3
Warren Buffett, as Graham's most famous student, took his foundational principles and iterated them. One approach Graham favored was buying "cigar butts," or shares in struggling companies at dirt-cheap prices to eke out one last puff of profit—while Buffett, influenced by his partner Charlie Munger, shifted his focus.
Here’s an excerpt from one of Buffet’s famous investor letters:
“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible.
I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit.
Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original "bargain" price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen.”4
The key insight was that it can be far better to buy "a wonderful company at a fair price than a fair company at a wonderful price." 5 This marked a significant evolution in value investing. Instead of just looking for statistically cheap stocks, Buffett and Munger began searching for what they considered high-quality businesses with durable competitive advantages, or "moats."
A moat is a structural advantage that can help protect a company from competitors, potentially allowing it to generate high returns on capital for an extended period.6 Think of Coca-Cola's brand power or Google's dominance in search. Buffett and Munger taught us to focus on:
Do these strategies still perform in a market dominated by high-frequency trading and complex algorithms? While the tools may have changed, we believe human nature has not. Fear and greed can still drive the market today, creating the opportunities that value investors look for.
Algorithms are often programmed to react to data points, news, and price momentum, and often amplify short-term volatility. This can lead to even greater mispricing of quality companies based on a single bad earnings report or negative headline. An investor with a long-term perspective can take advantage of these irrational, machine-driven selloffs. In other words, Mr. Market is faster and more erratic than ever, but he can still offer potential bargains for patient investors.
The challenge today is that information is ubiquitous. Consequently, it’s more difficult to find "undiscovered" gems than it was in Graham's day. This makes the Buffett-Munger focus on quality even more relevant. Modern value investors have to be adept at analyzing business quality, management competence, and long-term competitive dynamics. Graham's net-net strategy (buying companies for less than their net current asset value) is less common, but his core principle of buying with a margin of safety remains vital.
So, how can investors apply these lessons today?
You can do your homework, develop watchlists and strike when the moment’s right. But that takes time and patience, a luxury today’s investor doesn’t have.
That’s when investors can turn to ETFs. It’s an easy way to invest in a diverse mix of companies with a singular focus, in some cases even the value strategies pioneered by Graham, Buffet, and Munger.
At Motley Fool Asset Management, we’ve long been fans of ETFs. Explore our lineup of ETFs to see how they may fit with your investment goals.