Value investing has a long history of outperformance. Benjamin Graham wrote the book on value investing along with David Dodd, and the strategy has been successfully implemented by several famous investors, including Graham’s protege Warren Buffett.
Value stocks are those that trade at low valuations based on metrics such as price-to-earnings, price-to-book, or price-to-cash flow. When the market has beaten down these stocks, it can be because the market has turned overly pessimistic about the future of those companies.
With depressed earnings expectations, these stocks will consistently produce earnings results above the Wall Street consensus. Since the stock price reflects earnings over time, the stock price climbs. The valuation multiple moves to reflect more normalized earnings expectations in the future.
