Concept

Value Investing

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Value Investing

The discipline of buying assets at prices below their intrinsic value — “buying dollars for 50 cents,” in Buffett’s formulation. The term’s origin lies in contrast: when “growth investing” was labelled in the 1960s (buying on the basis of future potential), the older, existing approach — buying on the basis of present asset values and cash flows — was retro-labelled as “value.”

The classical model: cigar-butt investing

Graham’s original method: find an asset selling well below its intrinsic value — a “cigar butt” with one puff left — buy it, collect the puff when the discount narrows, sell, repeat. The process captures discounts mechanically; it has nothing to say about the long-run quality or potential of the business. Howard Marks began his career in this tradition, learning from junk bonds that “it is not what you buy but what you pay.”

The theologised form and its limits

By the 1980s and 1990s, the value/growth distinction had hardened into a binary. Insurance companies, pension funds, and sovereign wealth funds allocated to “value” or “growth” buckets; investment managers declared which bucket they were in. Marks describes this divide as “theologised” — transformed from a working principle into a rigid doctrine.

The doctrinal form defines value investing purely by price metrics: low P/E, low P/book, low P/revenue ratios. It has nothing to say about a company’s quality — its competitive position, growth durability, or the rate at which it compounds intrinsic value. Under the doctrine, a company trading at 80× earnings is automatically excluded, regardless of how rapidly its intrinsic value is growing.

The practical failure: Bill Miller — the only fund manager to beat the S&P 500 for 15 consecutive years — bought Amazon in 1999–2000 at what looked like extreme multiples. He described it as looking “like value to me.” The theologised value investor who dismissed Amazon on PE grounds missed the bulk of its return.

The Something of Value revision (Marks / Andrew Marks, 2021)

During the 2020 COVID lockdown, Howard Marks and his son Andrew, a professional investor, had three months of sustained conversations that produced the January 2021 memo Something of Value. Andrew’s core challenge: Buffett’s actual method since Charlie Munger’s influence in the 1960s is not cigar-butt rotation but buying great companies at fair prices and holding for decades. Charlie Munger is broadly credited with redirecting Buffett from Graham’s pure discount-rotation model; even Ben Graham’s greatest investment — Geico — was a great company, not a cigar butt.

The revision does not abandon price discipline; it softens the edges of the divide. The corrective is open-mindedness:

  • Distinguish “value investing with a small v” (buying things well, whatever the quality of the business) from “capital-V Value investing” (buying on present price metrics alone).
  • A great compounder — one that grows intrinsic value at 15–20% per year for 15–20 years — may justify a price that looks expensive today because the future growth dominates the valuation.
  • The discipline of holding through noise is as important as the discipline of buying at a discount.

Market efficiency and the shrinking edge

Both the cigar-butt and the capital-V value models depend on the market’s inefficiency: discounts exist because other investors do not recognise the undervaluation. Marks argues that market efficiency has increased dramatically since the 1960s. Everyone now has data feeds, screening tools, and the same training in Graham’s method. The SEC ensures all investors receive material information simultaneously. “Who doesn’t know that?” — Marks’s test — now almost always returns “everyone.”

Andrew Marks’s formulation: widely available quantitative information on the present is unlikely to be the source of superior profits. The remaining edge comes from:

  1. A better understanding of non-quantitative information available today (management quality, competitive dynamics, regulatory trajectory).
  2. A better understanding of future developments.

Marks calls both “feel” — conclusions that are logically defensible but not derivable by calculation. See Howard Marks on the Value-Growth Divide, Investing in Uncertainty, and Living Well §4.

Where mainstream views differ

Price as a sufficient protection: Orthodox capital-V Value investors — in the tradition of Greenblatt’s Magic Formula, Tweedy Browne’s quality screens — hold that buying at a sufficient discount provides a margin of safety that makes company quality secondary. If the price is right, you do not need to predict the future. Marks’s revision acknowledges this logic but argues it is increasingly unavailable: if the discount is universally visible, it has already been competed away.

Growth investing as speculation: The Austrian/classical value tradition holds that paying high multiples for future growth is speculation, not investment, because the future is unknowable and the distant cash flows are heavily discounted. Marks does not fully rebut this; he says open-mindedness is needed but stops short of endorsing growth investing as a system. His actual portfolio (distressed debt, high-yield credit) has remained in the classical value tradition throughout.

EMH implications: Some take the efficient market hypothesis further than Marks does — if markets are efficient, no active manager can systematically outperform, and “feel” is a post-hoc rationalisation of luck. Marks does not engage directly with the strong form of the EMH; his implicit position is that the market is highly efficient with respect to quantitative information but less efficient with respect to qualitative and forward-looking information, leaving room for systematic outperformance by investors with superior insight.

Greenblatt’s Magic Formula — systematic cheap-plus-good

Joel Greenblatt‘s evolution from concentrated special situations to his quantitative Magic Formula traces the same Graham-to-Buffett arc: away from cheap-only cigar-butt rotation and towards cheap-plus-quality. The Magic Formula ranks the entire market by two metrics — return on tangible capital (quality) and earnings yield (cheapness) — and buys the top-ranked decile. Backtesting from 1987 shows an ordered relationship by decile: top beats second, second beats third, and so on, not just tail-vs-median noise.

The key departure from orthodox value: Greenblatt adds the quality filter not because it produces the highest raw return (cheap-only may produce slightly higher raw returns) but because it reduces the emotional volatility that causes investors to abandon systematic strategies at the worst moment. The formula succeeds partly because it underperforms for two to three years at a stretch — long enough to drive short-term investors away.

His career arc mirrors the Something of Value revision: he started in concentrated special situations (40% annualised at Gotham Capital, 1985–2000), shifted to paying fair prices for great businesses after reverse-engineering Buffett’s Moody’s position, and eventually built diversified systematic portfolios as the special situation pipeline dried up. See Joel Greenblatt on Special Situations, the Magic Formula, and Paying Up for Quality.

Damodaran’s consistency requirement

Aswath Damodaran adds a discipline most value investors ignore: if you buy because price < value, you must sell when price > value. “Buy and hold forever” is internally inconsistent — you are claiming to buy undervalued assets but then refusing to sell overvalued ones. He has sold Amazon four times, each time leaving money on the table, because his philosophy demands it. The corollary: portfolio concentration (three or four stocks) is hubris, since it claims not merely that each is undervalued but that prices will converge on value for all of them simultaneously.

Miller’s future-value departure

Bill Miller held the only 15-year consecutive record of beating the S&P 500 (1991–2005) and was an early, persistent holder of Amazon. His core departure from classical value investing is epistemological: intrinsic value is backward-looking (calculated from past earnings, book value, cash flows), but all value depends on the future. Buying at a discount to intrinsic value is therefore buying at a discount to the past — which is the wrong thing to discount against.

Miller’s formulation: “100% of the information you have to use to value a business is based on the past, but 100% of the value depends on the future.” He still insists on a discount to his estimate of value — but his estimate is forward-looking, built from a probability-weighted distribution of what the business will be worth, not what it is worth today. This requires genuine comfort with Knightian Uncertainty.

The Amazon case: bought at the IPO, re-entered at $88 in 1998, averaged down through the 2002 lows (signal: Bezos shifting language from “balance sheet” to “customer experience”), held 40–50% of personal portfolio in 2022. At every entry point, standard value metrics (P/E, P/book) would have excluded it. Each proved correct on the future-value metric.

The 4% principle (James Anderson / Bailey Gifford): all S&P 500 long-run returns accrue to roughly 4% of publicly traded companies. The question is not whether a business looks cheap today but whether it is one of the 4%. Diversification virtually guarantees catching some of the 96%; concentration on the probable 4% requires buying before the uncertainty is resolved.

See Bill Miller on Amazon, Bitcoin, and Buying at a Discount to Future Value.

Pabrai’s cloning approach — ethics as moat

Mohnish Pabrai adds a methodological layer rather than a new theory of value: if you cannot generate original ideas as good as the best thinkers, systematically copy their portfolios. The 13F disclosure regime makes this tractable — concentrated funds with decade-long audited track records reveal the output of superior research for free. Pabrai applies Cloning beyond stock picks to operating habits (replicating Munger’s pen-scribble reply method), philanthropy (Dakshana cloned from another NGO), and daily practice.

His second contribution is ethics as competitive moat, absorbed from Charlie Munger: “if crooks knew how much money you could make by not being crooked, they would stop being crooks.” Trustworthiness compounds on a log scale. Berkshire seals deals with a handshake; Pabrai aims for the same in his ecosystem. Munger’s observation is that people like Pabrai and himself deserve less moral credit than they would if ethics worked against their interests — it does not, and that is precisely the point. The disciplined value investor who is also demonstrably trustworthy has access to opportunities and relationships not available to those who optimise the single transaction.

See Mohnish Pabrai on Charlie Munger, Cloning, and Ethics as Competitive Advantage.

McLennan’s variegation and scarcity variant

Matthew McLennan of First Eagle Investments adds a portfolio-construction layer to value investing: scarcity as the primary quality filter, and variegation as the primary diversification method.

Scarcity replaces raw cheapness as the starting filter. McLennan looks for businesses with either scarce real assets (a dominant physical asset position) or scarce market position (dominant niche share producing scale economies in R&D, manufacturing, or distribution). Roughly 10% of investable businesses worldwide qualify — the “prime numbers” that don’t factor into other businesses’ dominance. Scarcity means a business can survive downturns as a predator (buying back stock at lows, absorbing weaker competitors) rather than as prey.

Variegation is intentional non-uniformity: deliberately choosing different industries, countries, and asset types (equities, gold, cash) so the portfolio can flourish under multiple scenarios. This differs from statistical diversification, which tends to replicate market weights (>70% US, heavily concentrated in tech megacaps). A variegated portfolio is never a “unidimensional theme.”

Margin of safety completes the framework: buy only at a price that assumes little future growth, so growth arrives as free optionality. The prime-number universe and patient global scope mean that somewhere, at any time, a prime business is trading at a compelling valuation because of a temporary exogenous shock.

See Matthew McLennan on Variegation, Positional Assets, and Resilient Wealth and Positional Assets for the complementary argument that gold and prime real estate — positional assets with fixed supply — serve as the long-term store of value within this portfolio construction.

Marks: avoid disaster as the defining discipline

The 2024/25 episode (RWH063) focuses on the defensive philosophy that has defined Oaktree since its founding. The source is a 1990 dinner with the General Mills pension fund executive David Van Benschoten: a portfolio never above the 27th percentile or below the 47th for 14 years produced a 14-year fourth-percentile result. Consistent avoidance of the worst outcomes compounds better than heroic peaks followed by blowups, because losses are asymmetric (a 50% loss requires a 100% gain to recover).

Marks’s extension: Fewer Losers or More Winners is a forced choice. The skillful aggressive investor gets more winners; the skillful defensive investor gets fewer losers. Oaktree chose the defensive game and has maintained it. See Risk Posture for the full framework, including the speedometer calibration and the mechanism of “taking the temperature.”

Graham and Dodd (1940): bond investing is a “negative art” — in a universe of 100 bonds where 90 will pay, the only thing that matters is not buying the 10 that default. The same logic applies to equities when reframed through Oaktree’s lens.

Shayegh’s roots-and-branches epistemology

Nima Shayegh offers the most radical formulation of the qualitative edge: a full epistemological framework he calls Roots and Branches. Branches are all quantifiable surface metrics (quarterly margins, unit growth, web-scraped data); roots are the qualitative forces causally upstream of economics (management motivation, culture, product quality, customer alignment). The investment industry has swung heavily toward branches; roots remain largely uncontested territory because accessing them requires pre-intellectual perception rather than tools.

Foundation from Lou Simpson: “All investing is figuring out the future economics of a business.” The roots determine those future economics; branches describe only the present.

Practical implications: Shayegh studies Appfolio’s partnership culture (non-promotional, no Q&A on earnings calls) and Brookfield’s management co-investment not as data points but as root perceptions. His concentrated portfolio of fewer than ten holdings reflects the scarcity of businesses where the roots are knowable and durable.

The ego is the distorter: institutional biases (“I can’t own that because it will make fundraising harder”), inability to admit error, illusion of control through ever-more-precise modelling. Removing ego-driven distortions is the active work of qualitative investing.

See Roots and Branches for the full concept; see Nima Shayegh on Roots and Branches, Lou Simpson, and Surrendering to Uncertainty.

Grant’s historical scepticism

Jim Grant‘s contribution to the value investing canon is adversarial: he represents the permanent defensive posture taken to its logical extreme. Where Marks calibrates aggressiveness on a speedometer, Grant is structurally positioned at approximately 10 on the dial and has been for most of his career. His framework is not a novel theory of intrinsic value but a diagnosis of market-structural disease — Decadent Finance — that tells him when the playing field is corrupted.

The October 2025 data point: S&P 500 CAPE at 40× (second only to the 1999 dotcom peak at 44.2×); Magnificent 7 capex $382B in 2025 (triple 2023); private equity carrying assets at unreasonable valuations while unable to return capital to institutions. Grant’s inference is not a price target or a sell signal but a structural observation: all the props of a major market top are in place. “The theatre of the major financial market top is on the stage.”

The connection to value investing: Grant’s consistent argument is that the value investor’s discipline — buying at discounts to intrinsic value, avoiding speculation, maintaining clean balance sheets — is precisely the behaviour that the decadent finance regime punishes in the short run but rewards over a full cycle. The companies with fortress balance sheets that can act as predators in a downturn (see Matthew McLennan on Variegation, Positional Assets, and Resilient Wealth) are the same ones Grant would identify as the only safe positions in a major correction.

Graham and Dodd’s “negative art” applies here: in a universe of 100 companies, the discipline is not buying the best 10 but not buying the 10 that collapse when the cycle turns.

See Jim Grant on the AI Bubble, Decadent Finance, and the Lessons of History.

Hagstrom: pragmatism as the unifying revision

Robert Hagstrom synthesises the pragmatic critique of classical value investing most explicitly, drawing on his 14 years working alongside Bill Miller. His contribution is both philosophical and empirical.

The philosophical layer: Miller taught Hagstrom to distinguish the correspondence theory of truth from the pragmatic theory. The correspondence value investor holds that value is defined by a fixed set of metrics — low P/E, low P/book — and that departing from those metrics is error. The pragmatic investor asks where value is actually working and follows it. “Value is always in the marketplace. It just migrates.” Classic value managers who lost decade-plus performance numbers did so “because of stubbornness” — a correspondence theory failure, not an analytical failure. See Pragmatic Theory of Truth.

The empirical layer: Hagstrom makes the affirmative case for concentrated low-turnover investing with Bessembinder’s data (4% of stocks = all long-run equity returns above T-bills) and Cremers/Petajisto’s academic confirmation (high active share + low turnover = persistent excess returns). The mathematics are unambiguous; the barrier is neurological — prospect theory (losses felt 2× more than gains) prevents almost all investors from holding the 41%-average-drawdown portfolio that produces the excess return.

The description/explanation insight: most investment errors are description errors, not calculation errors. The investor who described Amazon as “a money-losing retailer” had the wrong description; their explanation (“avoid”) followed inevitably. Correct description (Dell: negative working capital, 100% ROIC) produces the correct explanation (“buy and hold”). This framework applies to value investing generally: the discipline of identifying genuine value starts with choosing the right description for a business.

See Robert Hagstrom on Pragmatic Truth, Multi-Disciplinary Investing, and the Concentrated Portfolio.

Van Den Berg: character as the foundation

Arnold Van Den Berg offers the most fundamental account of value investing in the wiki: it is not primarily a set of techniques but an expression of character. Dostoevsky’s observation — that Gulag survivors were people of highest character — applies to markets: only investors of genuine character survive prolonged bear markets intact. Arnold began his career in a six-year bear market that destroyed most of his contemporaries. His survival was not analytical; it was character-driven and underpinned by a daily mental programme (see Subconscious Programming) that prevented panic from overriding conviction.

His investment posture in 2025 is deeply defensive: heavily in commodities (gold at 8%, natural gas, uranium), minimal S&P 500 exposure, 15–20% cash, no Treasury bonds beyond 3-year maturity. His macro thesis is consistent with the value tradition: dollar debasement + fiscal excess → commodity outperformance. The same common-sense filter that Grant applies — “does this make sense if you think about it plainly?” — Arnold applies: natural gas at $3 with a $10 BTU parity is not a complex trade; it just requires patience and character.

See Arnold Van Den Berg on Survival, the Subconscious Mind, and a Life Well Lived.

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