Notes on Value Investing

Principles of value investing, Benjamin Graham's + Warren Buffett’s framework and philosophy

February 15, 2025 finance notes value-investing buffett

Value investing is the practice of buying assets for less than their intrinsic value.

Value Investors Don’t Follow the Herd

Value investors tend to behave like contrarians. Rather than following the crowd, they often do the opposite:

  • When everyone is buying, they may sell or step aside.
  • When everyone is selling, they may buy or hold.

This mindset stems from skepticism toward the efficient-market hypothesis, which claims markets always price assets correctly.

Instead of chasing trendy stocks that are already expensive, value investors:

  • Look for undervalued or overlooked companies
  • Re-evaluate strong companies when prices fall sharply
  • Focus on financial fundamentals, not popularity

Importantly, value investors treat stocks as ownership in real businesses. Their goal is to own companies with sound financials and durable business models regardless of market sentiment.

Warren Buffett: The Definitive Value Investor

No investor embodies value investing more clearly than Warren Buffett, chairman and CEO of Berkshire Hathaway. Often called the Oracle of Omaha, Buffett built extraordinary wealth over more than six decades by applying principles taught by his mentor Benjamin Graham.

The Core of Buffett’s Philosophy

Buffett summarizes his strategy with a simple idea:

“Buy wonderful companies at fair prices rather than fair companies at wonderful prices”

He looks for businesses with several key traits:

  • Durable competitive advantages
    Buffett calls this an economic moat. Strong brands, network effects, switching costs, or cost advantages protect profits from competitors.

  • Honest and competent management
    Managers should behave like owners, not short-term caretakers.

  • Consistent earning power
    Businesses should generate reliable and growing free cash flow.

  • Simple, understandable models
    Buffett invests only within his circle of competence—industries he understands deeply.

The Margin of Safety

The margin of safety, inherited from Benjamin Graham, is central to Buffett’s approach.

Investors should only buy when the market price is significantly below intrinsic value. This gap provides protection against:

  • analytical mistakes
  • unexpected economic changes
  • business setbacks

Long-Term Thinking

Buffett’s preferred holding period is famously “forever.”

Once he finds a high-quality company at a reasonable price, he rarely sells. This long-term approach allows:

  • compounding returns to work over decades
  • reduced taxes and transaction costs
  • the business itself to grow in value

Mr. Market and Emotional Discipline

Benjamin Graham introduced the metaphor of Mr. Market, an emotional business partner who offers to buy or sell shares every day at changing prices.

Mr. Market’s moods swing wildly:

  • Panic → prices fall dramatically
  • Euphoria → prices rise irrationally

Mr. Market exists to serve you, not guide you.

Rational investors:

  • Buy when fear drives prices too low
  • Sell or wait when optimism pushes prices too high

Emotional discipline—acting on logic instead of fear or greed—is a defining trait of successful investors.

Market Psychology and Herd Mentality

Many investors act based on psychological biases rather than fundamentals.

When prices rise rapidly:

  • investors experience fomo
  • they buy simply because others are buying

When prices fall:

  • loss aversion pushes investors to sell
  • panic selling accelerates declines

This behavior amplifies market movements, often pushing prices far above or below intrinsic value.

Market Bubbles and Crashes

A market bubble forms when prices rise far beyond the underlying value of assets. Eventually, the growth becomes unsustainable and the bubble bursts.

Two major examples include:

  • The dot-com bubble (early 2000s) — technology stocks surged far beyond realistic valuations.
  • The housing bubble (2006–2008) — collapsing housing prices triggered the global financial crisis.

During these periods, widespread panic leads to massive sell-offs and market crashes.

Key Takeaways

  1. Focus on intrinsic value, not market hype
  2. Invest only when there is a margin of safety
  3. Ignore short-term market noise
  4. Think long term and allow compounding to work
  5. Maintain emotional discipline when markets swing

More finance notes available in the Finance section.

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