What Is Value Investing and Can It Work for UK Investors?
Value investing — buying shares below their intrinsic worth — is one of the oldest investment strategies. Here's how it works and whether it still has merit.
The Origins of Value Investing
Value investing is an investment philosophy first articulated by Benjamin Graham and David Dodd in their 1934 book Security Analysis, later popularised by Graham's book The Intelligent Investor. The core idea is simple but powerful: the stock market frequently misprices securities, creating opportunities to buy businesses for less than their intrinsic value. By buying at a sufficient discount to intrinsic value — Graham called this the margin of safety — investors can earn superior long-term returns while limiting downside risk. Warren Buffett, Graham's most famous student, refined value investing into the wealth-creation approach that made him one of the richest people in the world.
What Value Investors Look For
Classic value investors look for companies trading at low prices relative to their earnings (low P/E ratio), assets (low P/B ratio), cash flow, or dividends relative to the broader market or their own historical averages. The underlying premise is that if you can identify businesses that are genuinely worth more than the market is paying for them — due to temporary difficulties, neglect, or market pessimism — and wait patiently for the market to recognise their true value, you can earn above-average returns.
The Value Premium: Does It Exist?
Academic research by Eugene Fama and Kenneth French documented a persistent historical value premium — the tendency of cheap stocks (measured by price-to-book ratio) to outperform expensive stocks over the long run. This premium has been observed across multiple countries and time periods. However, value investing experienced a prolonged period of underperformance from approximately 2007 to 2020, as growth stocks — particularly US technology companies — dramatically outperformed value stocks. This raised questions about whether the value premium would persist or had been arbitraged away.
Value Investing in the UK Context
The UK stock market has historically had a value tilt relative to global markets — the FTSE 100 is dominated by sectors like energy, mining, banking, and consumer staples that often trade at lower valuation multiples than technology-heavy US indices. UK-focused value investors have found fertile hunting ground in sectors like utilities, financials, and resources, where companies with strong cash generation trade at modest valuations due to lower growth expectations or temporary sector headwinds.
Value ETFs and Factor Funds
UK investors can access a value tilt through factor ETFs without needing to pick individual value stocks. The iShares MSCI UK Value Factor ETF and Invesco FTSE RAFI UK 100 ETF both tilt towards cheaper UK stocks using systematic screening criteria. Dimensional Fund Advisors — available through financial advisers — runs sophisticated factor-based portfolios with a value and profitability tilt. These provide systematic exposure to the value premium at relatively low cost without requiring individual stock research.
Is Value Investing Right for You?
Classic Graham-style value investing — buying deeply discounted individual stocks — requires significant analytical skills, patience, and psychological fortitude to hold unfashionable stocks during extended underperformance. For most retail investors, a simple global index fund strategy will serve them better than attempting individual value stock selection. A value factor ETF representing 10 to 20 per cent of an equity allocation may add some systematic value tilt for those who believe in the premium, without requiring the deep analysis that individual value investing demands. The evidence for the value premium is real but its future persistence is uncertain — a modest, diversified tilt rather than an all-in strategy is the sensible approach.
