What is value investing?
Value investing is an investment approach built on a simple principle: buy stocks whose price is below the company's intrinsic value. The gap between true value and the price paid is the margin of safety.
The method was formalised by Benjamin Graham in Security Analysis (1934) and The Intelligent Investor (1949). His most famous disciple, Warren Buffett, enriched the approach by favouring quality companies with a durable competitive advantage (a moat) at a reasonable price - rather than mediocre companies at a very low price.
The founding quote: Graham summed up investing in one phrase: "Buy a dollar of assets for fifty cents." Buffett updated it: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
The 5 principles of value investing
- Intrinsic value - every company has a fundamental value that can be calculated from its discounted future cash flows or its assets. The share price can drift away from it.
- Margin of safety - only buy with a significant cushion (≥ 30%) between estimated value and price. It protects against analytical errors.
- Mr Market - the market is irrational in the short term. Its excesses (panic or euphoria) create opportunities for the rational investor.
- Long-term horizon - value always expresses itself eventually, but it can take time. Impatience is the value investor's enemy.
- Circle of competence - only invest in sectors and companies you genuinely understand. It is better to pass on an opportunity than to misjudge a complex business.
The margin of safety
The margin of safety is the central concept of value investing. It is calculated as the gap between the estimated intrinsic value and the market price:
| Margin of safety | Interpretation | Action |
|---|---|---|
| > 40% | Large discount - classic value opportunity, limited risk | Buy possible |
| 20 – 40% | Moderate discount - interesting if company quality is confirmed | Worth studying |
| 0 – 20% | Small discount - little room for error | Wait |
| Negative (price > value) | Overvaluation - no value opportunity | Avoid |
Margin of safety calculator
Value criteria applied to small caps
To screen Euronext Growth small caps on value criteria, here are the thresholds used in the screener:
- EV/EBITDA < 8 - moderate valuation relative to the ability to generate operating cash
- P/E < 15 - the stock trades at less than 15 times its earnings
- ROCE > 12% - the company uses its capital efficiently
- Net debt/EBITDA < 2 - financial strength that protects value
- Revenue growth > 5% a year - the value grows, not just a compressing valuation
- Stable or rising EBITDA margin - operating profitability is defensible
The value-trap pitfall: a cheap stock can stay cheap - or fall further. A company with a P/E of 5 may be an opportunity or a sign of irreversible decline. The differentiating criterion: the quality of the business (ROCE, moat) and the management (capital allocation). A good screener filters out value traps by combining valuation AND fundamental quality.
Why small caps are ideal for value
Euronext Growth small caps have several characteristics that make the value method particularly effective:
- Thin analyst coverage - fewer than 10% of Euronext Growth stocks are followed by analysts. Valuation inefficiencies persist longer.
- Fewer institutional followers - large funds cannot take meaningful positions in small caps trading at €200k/day of volume. The individual investor is on a level footing with the pros.
- Readable catalysts - half-year results, contracts announced through regulatory channels, guidance updates. Information is accessible and catalysts can be identified in advance.
- Faster mean reversion - the valuation discount typically closes within 12-24 months on a quality small cap rediscovered by the market.
Go further
Put it into practice: browse the currently undervalued European stocks or read the European small-cap stock screener guide.