The true philosophical and academic origin of value investing lies with Benjamin Graham, an investor and professor at Columbia Business School.
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
- Benjamin Graham
Buffett was Graham's student at Columbia in the early 1950s and later worked for Graham's investment firm.
In interviews, Buffett has repeatedly emphasized the significance of Chapters 8 and 20 in Benjamin Graham’s The Intelligent Investor.
Chapter 8 introduces the allegory of “Mr. Market,” a fictional business partner who shows up daily with a new price for your investment - sometimes euphoric and overpaying, other times fearful and offering a bargain. Graham urged investors to ignore his emotional swings and be rational when making investment decisions.
“The stock market is a no-called-strike game. You don’t have to swing at everything - you can wait for your pitch.”
-Warren Buffett
Chapter 20 introduces the principle of “margin of safety,” a cornerstone of value investing. It encourages investors to purchase assets at a meaningful discount to their estimated intrinsic value, creating a buffer against analytical misjudgments, unexpected economic shifts, or short-term market volatility.
Buffett spent a large portion of his early career doing exactly this. His investments during this period - in net-net stocks, cigar-butt businesses, and deeply discounted assets - reflected a strict adherence to Graham’s philosophy.
Under the influence of his partner, Charlie Munger, Buffett evolved the philosophy in the late 1980s. He moved from "Buying a fair company at a wonderful price" (Classic Graham) to "Buying a wonderful company at a fair price" (Modern Buffett/Munger).
Instead of focusing solely on low valuation metrics, he began prioritizing firms with economic moats: structural features that protect profitability and market share from competitive threats. These moats might stem from brand strength, cost advantages, network effects, or regulatory barriers.
Now, the goal was to own businesses that could sustain high returns on invested capital (ROIC) over long periods - not just look cheap on this year’s earnings. In Buffett’s view, a truly wonderful business is one where competitors struggle to erode its economics, allowing it to compound value consistently without requiring constant reinvestment.
It’s a mindset shift from “what’s undervalued today” to “what can grow and endure for decades.”
"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return - even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result."
-Charlie Munger
In 1988, Buffett made a big bet and bought ~$1 bn in Coca Cola shares. Buffett paid what Graham would have considered a high price as defined by its price to earnings (P/E) at that time. He did so because he was confident that company's moat, growth and high ROIC would make the stock a ‘fine result’ over the long term.
The purchase of Coca-Cola was met with skepticism, criticism, and concern from the traditional community of Graham-Dodd value investors. They viewed the investment as an act of speculation that violated the core tenets of value investing. It signaled, in their view, a shift from rigorous asset-based investing toward a more growth-oriented approach. In today's institutional context, a fund manager making a similar move might face serious pushback for what would be labeled “style drift”.
Following Coca-Cola, Buffett’s subsequent investments in GEICO - acquired at a notable premium to book value - and later Apple, further illustrated his evolved approach. In each case, he moved beyond traditional measures of statistical cheapness, instead focusing on businesses with durable economics, strong brand power, and the ability to generate consistent, high returns on capital.
What remained unchanged, however, were the foundational principles of value investing. Buffett still adhered to the discipline of Mr. Market - waiting patiently for the right price and insisting on a margin of safety, not in the form of deep discounts to book value, but in the resilience and earning power of the underlying business.
"Most analysts feel they must choose between two approaches customarily thought to be in opposition: 'value' and 'growth.' In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive."
-Warren Buffett
Buffett is arguing that the terms "value investing" and "growth investing" are redundant and conceptually flawed. He asserts that all intelligent investing is value investing, and growth is simply a factor in that calculation.
Our experience too suggests that a low price-to-earnings ratio is not a reliable indicator of value. A low P/E stock can be very expensive, especially if its earnings are declining due to industry disruption or competitive forces. Conversely, a business with a high P/E ratio can prove to be a bargain in hindsight - if it’s able to grow earnings consistently.
Then, if we were to redefine value investing, it would simply be:
Buy high-quality businesses when Mr. Market is irrationally pessimistic
That’s it!
Value investing, in its truest form, has little to do with low price to earnings (P/E) or price to book (P/B) ratios. It’s not about statistical cheapness but about buying businesses with durable economics at prices that offer a margin of safety.
So why does the investment industry and academia still define value through mechanical screens and build indices filled with low-multiple stocks?
We can think of two reasons:
Labels are simple and effective: The investment industry continues to rely on the labels such as ‘value’ and ‘growth’ because they serve as essential tools for categorization, benchmarking, and communication in a vast and complex global financial ecosystem. These labels help asset managers, advisors, and allocators signal a fund’s strategy and style to investors - whether it’s ‘Large-Cap Value,’ ‘Mid-Cap Growth,’ or ‘Small-Cap Blend.’
It is important to note that this has nothing to do with ‘making money’ but everything to do with fitting in a ‘box’.
“If you torture the data long enough, it will confess to anything.”
-Ronald Coase
This framework is further legitimized by decades of academic research (read: Fama-Franch etc.) and these definitions have become embedded in quantitative models, index construction, and ultimately institutional mandates.
“The most important things in investing are the things that you can’t precisely measure.”
- Howard Marks
It has been almost four decades since Buffett made that investment in Coca-Cola and yet this reliance on statistical proxies exists! Attributes like business quality, capital discipline, and competitive advantage are difficult to quantify, so the industry defaults to what’s easy to measure - low P/E, low P/B, and other statistical shortcuts.
Identity and Tribalism: The labels give investors a professional identity and a sense of belonging to a ‘tribe’. It reinforced the ‘us’ vs. ‘them’ mentality. Value investors adopt an identity centered on skepticism, discipline, and patience. They see themselves as the rational thinkers, protecting themselves against the ‘speculators’ (the Growth tribe).
Once an identity is adopted, investors seek out information that validates their chosen philosophy. This creates an echo chamber where each tribe only sees evidence confirming its own superiority. Tribalism provides psychological comfort in the face of market uncertainty.
More often than not, an investor’s portfolio reflects their personal biases
Importantly, by adhering to a defined set of rules and belonging to a group, the investor feels less individually responsible for underperformance, thereby prioritizing group security over independent thinking.
The notion that ‘value will make a comeback” implies it went away. We’d argue it never did. It simply evolved.
So how do you measure it? How do you know if your money manager is investing using a value investing strategy or simply speculating?
The answer is simple:
You need to understand what your money manager is actually doing.
There are no shortcuts!
Evaluating a money manager requires more than reviewing quantitative information. True understanding comes not only from assessing broad qualitative elements such as philosophy, discipline, and alignment of interests, but also from examining the quality of businesses in the portfolio and whether they were acquired during periods of pessimism.
The White Falcon portfolio does not fit into a 'box. We have companies in the portfolio that can be popularly categorized as deep value, value or growth. However, each of our portfolio companies meets our definition of quality and were acquired during a period when Mr. Market was depressed.
Your investment capital is hard-earned and hard-saved. Take the time to understand the fund manager’s philosophy, product structure, and risks involved.
