Market Letter XIV – All Intelligent Investing Is Value Investing

Value investing is often associated with low valuation multiples, traditional industries and an aversion to growth. Yet at its heart lies the relationship between business quality, market expectations and the price paid.

The basic idea behind value investing is an old one: buy something for less than it is worth. The principle fits into a single sentence, but applying it requires answers to hundreds of questions. Little wonder, then, that the same term is used to mean remarkably different things.

Imagine two investors. One buys a fast-growing technology company, the other an industrial business that has been operating for decades. The first says they invest in growth, the second in value.

The success of both investments depends on the companies’ future cash flows relative to the prices paid for their shares. The technology company may be overpriced despite its growth. The industrial company may be expensive despite its low valuation multiple. Or vice versa.

In this sense, all investing is value investing: the price paid should be justified by what the investor receives in return. This does not mean that all investors use the same method, or even assess the value of individual companies. It means that no investment style makes price irrelevant.

The idea is not new. In his 1992 letter to shareholders, Warren Buffett wrote that value investing is, in effect, a redundant term: investing should, by definition, seek value that justifies the price paid. Low valuation multiples do not prove that a value investment has been found, nor do high multiples rule one out.¹

Yet value investing is often reduced to a single ratio. That is rather like judging an apartment solely by its price per square metre, without looking at its location or the condition of the building.

Price is on the screen. Value must be assessed.

An active value investor looks for situations where the price is below their reasoned estimate of value. The market may, for example, underestimate the durability of a competitive advantage, overestimate a temporary problem or overlook a profitable growth opportunity.

The word estimate matters here. A company’s intrinsic value is not a correct answer locked away in a safe, waiting for the most talented analyst to discover it. It is an uncertain view of the future. Simply disagreeing with the market is not enough. Investors must be able to explain why the market might be wrong, why their own assessment might be better and what could prompt the market to reconsider its view.

Figure 1: A share price can fluctuate sharply while the underlying business develops much more steadily over the long term. The value investor’s task is to distinguish movements in price from changes in business value. Source: Brian Feroldi.

In academic research, however, a value stock is often defined mechanically: it is inexpensive relative to earnings, book equity or cash flow. The definition is measurable, repeatable and testable. In this article, I call an approach based on such rules systematic value investing.

“Price is what you pay, value is what you get”

Warren Buffett

One philosophy, many ways to invest

Discussions of value investing often blur the distinction between the investment philosophy and the individual methods used to implement it.

A well-known example of systematic value investing is the HML value factor introduced by Fama and French in 1993. It buys low-P/B stocks (cheap) and sells short high-P/B stocks (expensive), accounting for small and large companies separately. The P/B ratio relates a company’s market capitalisation to its book equity. HML measures the return difference between the portfolios formed in this way.

The historical gap between these groups of stocks has been substantial. Figure 2 shows French’s data for the US equity market, extended through to the present. Cheap stocks have delivered annual outperformance of 3.6% relative to expensive stocks. Alongside the HML factor, the chart illustrates this outperformance using long-only portfolios: since 1926, high-book-to-market, or low-P/B, value stocks have created considerably more wealth for investors than low-book-to-market stocks.²

Figure 2: Cumulative performance of US equity portfolios based on the Fama–French definition of value, since 1926. The left-hand scale is logarithmic; the right-hand scale is linear. Source: Kenneth R. French Data Library; chart: Proprius Partners Oy. Period: 1 July 1926–31 August 2026. Chart key: solid grey = expensive stocks (left axis); pink = cheap stocks (left axis); dotted grey = HML (right axis).

The method’s strength is its simplicity. So is its limitation.

HML does not tell us whether a low multiple reflects poor returns on capital or excessive market pessimism. Nor does it neutralise industry weights. Cliff Asness, founder of US investment firm AQR and a former student of Fama, has suggested a more fitting name for such value factors: the “low-multiple factor”.³

A high multiple does not, by itself, mean expensive if the characteristics of the business justify it. Despite the limitations of the HML approach, investing in cheap stocks defined in such a simple way has been highly rewarding over the long run.

Modern systematic value strategies do not, of course, stop at a single metric. The MSCI Enhanced Value indices, for example, assess book value, forecast earnings and operating cash flow relative to price within the same sector. Systematic models can also incorporate profitability, balance-sheet strength and other quality measures.

Another approach is discretionary value investing⁴, in which stock selection is based on the portfolio manager’s company analysis. This examines, among other things, future cash flows, competitive advantages, management’s capital allocation and risks relative to the price of the shares. Valuation metrics are the starting point, but the final investment decision is not determined by a score alone. Here, too, the value premium provides a long-term tailwind, while the portfolio manager aims to generate additional returns through stock selection grounded in a deep understanding of the businesses.

The emphasis on valuation and quality can vary within either approach. At one end of the spectrum is deep value, where the focus is on a large valuation discount, potentially accepting considerable business uncertainty in return. At Proprius, we lean in the other direction: we prefer to combine valuation with business quality rather than pursue the lowest possible multiples. We look for sustainable value creation at a price that leaves investors a margin of safety.

”It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Warren Buffett

Why has buying cheap paid off over time?

The outperformance of companies trading at low valuations is one of the best-known findings in financial research. The phenomenon is not limited to the single metric in the preceding chart or to the United States. In their 2013 study, for example, Asness, Moskowitz and Pedersen found value and momentum premia across eight different markets and asset classes. The historical evidence does not, however, conclusively establish why the value premium exists.

The risk-based explanation is that some cheap companies are more cyclical, more exposed during periods of market stress or otherwise more sensitive to market risks. Their businesses may suffer from precisely the economic shocks that hurt investors elsewhere as well. A higher expected return would compensate for that risk. The evidence is mixed, however. Antti Ilmanen, a respected authority on expected returns, notes in his book⁵, that value stocks had higher sensitivity to market risk, or beta, than growth stocks before 1963, but that the relationship was actually reversed over the subsequent period examined. Value stocks’ relative performance during market crises has also varied, with no unambiguous pattern. Price volatility or sensitivity to market movements alone does not, however, capture every economically relevant risk.

The behavioural explanation starts with the investor. Successful growth is projected too far into the future, while problems are assumed to be too persistent. In their 1994 study, Lakonishok, Shleifer and Vishny identified this excessive extrapolation as a key explanation for value stocks’ outperformance. A good company and a good investment are easily confused when price is left out of the equation.⁶

I find it plausible that both explanations play a role. A cheap stock may reflect both genuine risk and excessive pessimism. The value investor’s difficult task is to distinguish between them.

Identifying mispricing and profiting from it are also two different things. Asness points out that larger pricing errors may create better opportunities while making it harder to stick with a strategy. The market is under no obligation to correct its prices before the investment committee’s next meeting.

“Good investing has always been a challenge combining a) discerning what is right, and b) sticking with what is right.”

Cliff Asness

For us, value is about the business, not a valuation label

For us, value investing means a deep respect for price. It forces us to challenge market expectations and scrutinise the multiples at which our portfolio companies trade. Sometimes that leads us to sell; sometimes it means retaining a holding despite a rising multiple. Every company and situation is different. A rising valuation multiple is not an automatic reason to sell: the value of the business may be growing faster than its share price.

We combine valuation analysis with an assessment of management, owners, competitive position, pricing power, the balance sheet and capital allocation. Qualitative analysis is not the opposite of numbers. Its purpose is to understand where the numbers come from and how durable they are.

Management quality is not determined by how convincing a chief executive sounds on stage. More relevant are the returns earned on the company’s investments, the acquisitions it has made and whether those decisions have increased value per share — not merely the size of the company. Pricing power, meanwhile, is not demonstrated by announcing a price increase, but by retaining customers and profitability afterwards.

When assessing valuation, we look for sustainable earnings power, not simply the earnings figure that makes a stock look cheapest today.

Value investors need not exclude business quality from their analysis. Asness emphasises that companies should not all trade at the same valuation multiples. High profitability and business quality can justify a higher price, and accounting for them makes valuation multiples more informative: a low multiple may signal genuine undervaluation or a fully justified discount for a weak business. Quality does not justify paying any price, but a low price does not compensate for every shortcoming in quality.

The evidence also supports combining value and quality. In Asness’s data for 1963–2014, the pure value factor had a Sharpe ratio of 0.46, while a 60/40 combination of value and profitability raised it to 0.58.⁷ His conclusion is straightforward: “Clearly, value does not work best alone. Far from it.”

The same reasoning dissolves the supposed divide between value and growth. Growth creates shareholder value when the return on the additional capital it requires exceeds the cost of that capital. Growing revenue is not the same as growing shareholders’ wealth. That is why we examine not only a company’s own investments, but also those of its competitors: how well will returns on capital hold up when others pursue the same growth opportunity?

”Growth is always a component in the calculation of value.”

Warren Buffett

We want to understand how shareholders benefit from the development of the business, its cash flow and sensible capital allocation even when the market is slow to change its mind. We do not choose between value, growth and quality. We decide what to pay for them. This philosophy runs through all our funds.

“All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”

Charlie Munger

In our value funds, DACH Value and Arvo Suomi, valuation multiples carry greater weight in our decision-making. Alongside selecting quality businesses, we aim to build portfolios that are cheaper than the market on earnings-based measures. That does not require every holding to be cheap on every metric. In our comparison at the end of September, Arvo Suomi’s P/E ratio based on forecast 2027 earnings was 13.4, versus 15.8 for the broad Helsinki stock market index. Yet the portfolio also held Nokia, whose corresponding P/E was 21.6. We see more potential in its future growth and profitability than we believe the price reflects. The same thinking underlies DACH Value’s holding in Galderma, the Swiss company specialising in skin care⁸

Value investing in practice – choices and outlook

The long-term case for value investing and the short-term outlook for value stocks are two different things. As Ilmanen reminds us, the long historical evidence for factor premia is much stronger than our ability to time them successfully in the short run. One can believe in the value premium without knowing whether value will beat growth, for example, next quarter.

We can nevertheless frame the outlook from several angles: recent relative performance (momentum), the valuation gap between cheap and expensive stocks (the value spread), and the economic and financial macro environment. Before turning to these, let us consider what value investing has meant in practice recently.

The past year has been a strong one for value stocks globally. In the US-dollar comparison in Figure 3, MSCI ACWI Value returned around 21.5% and MSCI ACWI Enhanced Value around 68.6%, versus 18.1% for the global equity market. The first two are both value indices, yet their returns differed by more than 47 percentage points over the year. What stands out is not simply the strong performance of value stocks, but how differently two implementations of the same investment style can perform.

Figure 3: One-year returns of the MSCI ACWI, MSCI ACWI Value and MSCI ACWI Enhanced Value indices, 29 September 2025–28 September 2026. Source: Bloomberg

This brings us back to the point made at the beginning: value investing is a simple philosophy, but putting it into practice involves numerous choices. That applies equally to stock pickers and systematic value investors.

Both MSCI value indices assess book value and forecast earnings for the next 12 months relative to price. The third metric differs: the standard Value index uses dividend yield, while Enhanced Value uses enterprise value relative to operating cash flow. Just as important, however, is how the companies selected using these measures are combined into a portfolio.

The standard MSCI ACWI Value index is constructed by dividing equity markets into value and growth styles, largely on a market-by-market basis. This keeps its broad geographical allocation relatively close to the parent MSCI ACWI index, while industry weights can differ substantially. As a result, the index holds many of the businesses commonly associated with value investing: banks, insurers, and oil and gas companies.

Figure 4: MSCI ACWI Value industry weights relative to MSCI ACWI. Current position as at 28 September 2026 and the five-year range. Source: Bloomberg

The chart offers an interesting insight into value investing across industries: although low multiples are more typical of some industries than others, no industry is inherently a value investment. Software companies have traditionally been a staple of growth investors’ portfolios, but the AI transition has also brought them onto value investors’ desks over the past year. An industry label does not determine whether an investment is attractive. What matters is the price worth paying for the future of the business.

Software companies therefore pose an interesting question for the discretionary value investor: has a company become cheaper because AI is genuinely weakening its competitive advantage, or because the market is applying the same threat narrative to the entire industry? A falling share price alone does not make a stock a value investment, but concern about an entire industry can obscure important differences between businesses. That is why it is essential to understand what underpins each company’s competitive advantage and how AI changes it.

Our portfolio manager Niko Fagernäs examines this disruption in his March market letter, AI’s Scythe Is Swinging. He explores how AI could change software companies’ customer relationships, the way customers are tied into their systems and, ultimately, where business value is created. These are precisely the questions that a valuation multiple alone cannot answer.

MSCI ACWI Enhanced Value takes a different approach. Its sector weights track the parent MSCI ACWI index, but its country weights can diverge sharply. Valuation scores also have a greater influence on individual company weights than in the MSCI Value index. Value exposure is therefore sought within sectors, rather than by allocating more to entire sectors that trade at low multiples.

Figure 5: MSCI ACWI Enhanced Value geographical weights relative to MSCI ACWI. Current position as at 28 September 2026 and the five-year range. Source: Bloomberg

The result is markedly different. At the end of September, the United States accounted for around 27% and South Korea for around 21% of the index. The three largest companies together represented more than one-fifth of its weight. Aligning sector weights does not eliminate country or company concentration, nor does it prevent a large allocation to memory-chip companies within the technology sector.

Figure 6: MSCI ACWI Enhanced Value sector and country weights, and its ten largest holdings, as at 30 September 2026. Source: MSCI

At this point, some readers may be doing a double take: what is a memory-chip company delivering annual earnings growth of several hundred per cent doing in a value index?

SK hynix illustrates why treating growth and value as opposites can be misleading. If earnings grow sufficiently, even a stock that has risen sharply can look inexpensive on future earnings estimates. In the chart, the P/E ratio based on forecast 2027 earnings is 2.74. Its inverse, the earnings yield, is therefore as high as 36.5%.

Figure 7: SK hynix consensus forecasts as at 19 October 2026. Source: Bloomberg

That sounds attractive, but it is neither a promised annual investment return nor a dividend paid into the investor’s account. What matters is how sustainable those earnings are and what it will take to grow them in the future.

This is where a systematic value screen meets company-specific analysis. The screen brings SK hynix to the value investor’s attention, but it does not determine whether earnings have reached a structurally higher level or are at the peak of an exceptionally favourable cycle. A low multiple can normalise because the share price rises — or because earnings fall. The difference matters a great deal to shareholders.

It also matters how often a portfolio is rebalanced to its target weights. The principal value and style reviews for these MSCI indices take place semi-annually. Sector neutrality at the point of rebalancing therefore does not mean the sector allocation remains unchanged between reviews.

Choosing the instrument also requires care. An ETF tracking MSCI World Enhanced Value does not provide the same exposure as the ACWI version, because emerging markets are excluded. That would leave out South Korea, for example, and some of the past year’s strongest performers. An ETF tracking MSCI ACWI Enhanced Value does not appear to be even available at present (19 October 2026).

A rules-based implementation of systematic value investing does not, then, remove the investor’s active choices. It shifts some of them from selecting individual companies to selecting an investment methodology.

What, then, does the recent performance of value indices tell us about the near-term outlook?

Since our investment focus is Europe, it is natural to turn the discussion here. European value stocks have also performed strongly relative to the market, as the white line in Figure 8 shows. That is a positive indication of the direction of returns — momentum — but it does not yet tell us how much of the opportunity remains.

Figure 8: Relative performance of European style indices, 20 October 2025–16 October 2026. White: MSCI Europe Value NTR Index / MSCI Europe NTR Index. Source: Bloomberg

In Europe, basic resources, oil and gas companies, and banks have been particularly strong. Their success is consistent with the strong performance of the conventional value index. We do not, however, assume that today’s leading industries will remain tomorrow’s winners indefinitely. High commodity prices attract additional supply, and further flattening of the yield curve would not support banks’ earnings. We therefore also look for opportunities in industries that have yet to benefit from the recent strength in value stocks. DACH Value expresses its characteristic value style in sectors other than those mentioned above.

Figure 9: Relative performance of European sectors, 20 October 2025–16 October 2026. STOXX Europe 600 Basic Resources NTR / STOXX Europe 600 NTR (orange); STOXX Europe 600 Oil & Gas NTR / STOXX Europe 600 NTR (green); STOXX Europe 600 Banks NTR / STOXX Europe 600 NTR (white). Source: Bloomberg

Alongside recent performance, it is useful to examine the value spread: how much less does the market pay for cheap stocks relative to expensive ones?

Figure 10: The ratio of European value stocks’ P/B multiples to those of growth stocks, and the annualised value premium over the five years following each starting date, 1975–2025. The lower the blue line, the larger the relative valuation discount on value stocks (the value spread). The bars show realised return differences, not forecasts. Source: Kenneth R. French Data Library and Verdad.

The blue line in Figure 10 shows the value spread in European equities. The lower the line, the larger the relative valuation discount on value stocks. The latest ratio in the data, which run to the end of 2025, is around 0.12, compared with a historical average of 0.21. Although value stocks’ relative valuations have recovered from their lows, the discount remains substantial on this measure.

The chart’s central message is that a strong period for value stocks does not necessarily mean the opportunity has been exhausted. The grey bars show the annualised value premium over the five years following each starting date. Verdad interprets Europe’s most recent positive five-year periods, together with the still-large valuation discount, as grounds for expecting favourable performance to continue. It notes that strong periods for value have historically been able to persist for a long time.

This is an argument for patience, not a forecast for next quarter’s returns. It is also worth remembering that the historical average is not a target price to which the market must return.

The value premium need not even require a rapid narrowing of the market-wide valuation spread. Remember that the companies in value and growth portfolios change: some cheap businesses deliver positive surprises and are re-rated, while some expensive favourites disappoint. Re-rating at the individual company level can reward value investors even if the gap between the cheap and expensive groups remains wide.

There is an important connection here to our own approach. Our investment thesis does not require the whole market suddenly to start favouring value stocks. We want to find companies where shareholder returns can be built on business progress and cash flow — and, potentially, on market expectations proving too cautious.

Alongside performance and value spreads, let us also consider the macroeconomic picture through a value investor’s eyes. We see stronger investment in Europe as an interesting opportunity in the years ahead. Spending on infrastructure, electricity grids and AI could broaden earnings growth to include attractively valued companies. For value investors, however, the question is not just whether demand will grow, but how profitably businesses can meet it.

If inflation and financing costs remain above the levels of the 2010s, rising funding costs and capital expenditure requirements could absorb part of the benefit from business growth. Growth in nominal earnings may therefore not translate into equally strong growth in free cash flow to equity (FCFE). In this environment, we place even greater emphasis on pricing power, strong balance sheets and disciplined capital allocation: a low valuation multiple alone does not compensate for a business’s inability to cope with a higher cost of capital.

The macroeconomic picture must also be viewed from the supply side. This is the central insight of the capital cycle approach: attractive growth prospects draw in investment, but if capacity expands faster than demand, greater competition can depress profitability and returns on capital. An investor can therefore be right about demand growth but wrong about investment returns. Conversely, limited investment and capacity closures in an unpopular industry can strengthen the position of the remaining businesses, provided demand holds up. This gives an economic foundation to the value investor’s contrarian approach: an attractive opportunity may lie where capital is retreating but sustainable long-term demand is not.

Patience is required

Patience matters in all investing, but it is particularly important in value investing.

Patience does not mean clinging to a stock until the original analysis appears to have been vindicated. If a company’s competitive advantage weakens, management destroys capital or cash flow expectations prove too optimistic, the estimate of value must change as well.

Equally, a falling share price does not prove that the business has deteriorated, just as a rising price does not prove the investor’s analysis was right. Price and value must be kept separate even when the market offers the least psychological support for doing so. The market may change its mind gradually or abruptly, and a valuation correction cannot be scheduled. Patience is therefore the best way to improve a value investor’s odds — for as long as the investment thesis remains sound.

Value investing is not nostalgia, opposition to technology or a defence of low valuation multiples. It is discipline about what is worth paying for, and how much.

In this sense, all intelligent investing is value investing. Through different methods, we ultimately approach the same question:

What future does today’s price already assume — and does it leave investors adequately rewarded even if that future does not unfold quite as planned?

“A long-term horizon is the closest thing to an investing superpower.”

Cliff Asness

1. Warren Buffett: Berkshire Hathaway’s 1992 Letter to Shareholders, Common Stock Investments.
2. In the context of the HML factor, Fama and French refer to low-P/B stocks as value stocks and high-P/B stocks as growth stocks. The growth label in particular can be misleading: the classification is based on price relative to book equity, not directly on companies’ realised or expected growth. “Cheap” and “expensive” therefore refer to valuation relative to book value, not an assessment of the intrinsic value of the business.
3. Cliff Asness (2024): The Less-Efficient Market Hypothesis
4. Asness et al. (2015) describe this as concentrated, value-based stock selection grounded in company-specific characteristics in Fact, Fiction, and Value Investing.
5. Ilmanen, Antti (2011). Expected Returns: An Investor’s Guide to Harvesting Market Rewards. John Wiley & Sons. s. 249–270.
6. Lakonishok, Shleifer & Vishny (1994): Contrarian Investment, Extrapolation, and Risk, Journal of Finance.
7. The results relate to factor portfolios combining long and short positions. Source: Asness, C., Frazzini, A., Israel, R. & Moskowitz, T. (2015). Fact, Fiction, and Value Investing. The Journal of Portfolio Management, 42(1), 34–52
8. Proprius Partners: portfolio holdings and valuation data, September 2026. Bloomberg consensus forecasts for 2027; forecasts and holdings are subject to change..