Value Investing Principles

Investing and Wealth Building • 7 min read

Introduction: The Warren Buffett Way

Warren Buffett bought Berkshire Hathaway shares at ₹1,000 and held them for 60 years. Today they're worth ₹45 lakhs+. How? By following one simple principle: Buy good companies at cheap prices and wait.

This is value investing. While everyone chases hot IPOs and growth stocks, value investors quietly find undervalued gems that eventually explode in value.

This guide explains value investing in simple terms, shows you how to find undervalued stocks using Benjamin Graham's proven principles, and provides real Indian stock examples.

What is Value Investing?

Simple Definition

💡 Value Investing:

Value investing is buying stocks trading below their true worth (intrinsic value) and holding until the market recognizes this value.

Real-Life Analogy

Wedding Gold Analogy:

Real gold worth ₹6,000/gram is being sold at ₹4,000/gram

(Someone desperate needs cash, so selling at loss)

You buy ₹10,000 worth at ₹4,000 price

Next month, gold price goes back to ₹6,000/gram

Your ₹10,000 purchase is now worth ₹15,000!

That's value investing: Buy at discount, sell at true value.

Key Principle: Margin of Safety

Never buy a stock at exactly intrinsic value. Always buy at a discount (30-40% below intrinsic value) to have a "safety cushion." This cushion protects if your analysis is wrong.

7 Value Investing Principles by Benjamin Graham

Principle #1: Company Size (Market Cap ₹20,000+ Crore)

Why?

Large companies more stable
Better financial records
Less likely to go bankrupt
Example: ITC, TCS, HDFC Bank (₹1,00,000+ crore market cap)

Principle #2: Healthy Current Ratio (1.5 - 3.0)

What's Current Ratio?

Current Ratio = Current Assets ÷ Current Liabilities

Shows if company can pay short-term bills. If ratio is 2, company has ₹2 for every ₹1 it owes.

Too low (<1): Company might struggle to pay bills. Too high (>3): Money sitting idle instead of growing.

Principle #3: Strong Dividend History

Why Dividends Matter?

Companies paying dividends for 10+ years = financially healthy
Example: ITC paid dividends consistently for 30+ years
Shows management confidence in future profits

Principle #4: Consistent EPS Growth

What's EPS?

Earnings Per Share = Company Net Profit ÷ Total Shares

If EPS grows 15-20% annually for 5+ years, company is profitable and growing.

Principle #5: Low P/E Ratio (Price-to-Earnings)

What's P/E Ratio?

P/E Ratio = Stock Price ÷ Earnings Per Share

Example: Stock trading at ₹1,000 with EPS of ₹50 = P/E of 20

Means you're paying ₹20 for every ₹1 of annual earnings

Graham's Rule: P/E should be <25 (under 15-18 is golden!)

Principle #6: Low P/B Ratio (Price-to-Book)

What's P/B Ratio?

P/B Ratio = Market Price ÷ Book Value Per Share

If P/B is 1.2, you're paying ₹1.20 for ₹1 of assets.

Graham's Rule: P/B should be <1.2 (stock trading at or below asset value!)

Principle #7: Low Debt (Debt-to-Assets <0.5)

Why Low Debt?

Companies with high debt = risky (might default)
Low debt = financial flexibility
Can invest in growth during downturns
Example: Coal India has debt-to-equity of 0.13 (very safe)

How to Find Intrinsic Value (Stock's True Worth)

Simple Method: Graham Number (For Beginners)

Graham Number = √ (22.5 × EPS × Book Value Per Share)

Example: TCS Stock
EPS: ₹62
Book Value Per Share: ₹800

Graham Number = √ (22.5 × 62 × 800)
= √ (11,16,000)
= ₹1,056

Interpretation:
If TCS trading at ₹1,500 = OVERVALUED (buy at ₹800-900)
If TCS trading at ₹700 = UNDERVALUED (great buy!)

P/E Ratio Method (Easiest)

Fair Value = EPS × Average Industry P/E

Example: Banking Sector Stock
Stock: ICICI Bank
EPS: ₹50
Average Bank P/E: 16

Fair Value = ₹50 × 16 = ₹800

If ICICI trading at ₹600 = Undervalued by 25% (Buy!)
If ICICI trading at ₹900 = Overvalued (Skip!)

Real Example: Finding Undervalued Stock in India

Case Study: Coal India Ltd (2024)

Company Analysis:

Current Price: ₹380

Market Cap: ₹2,40,000 crore (HUGE!)

EPS: ₹51 (very high!)

P/E Ratio: 7.4 (extremely low!)

Dividend Yield: 7% (amazing!)

Debt-to-Equity: 0.13 (very safe!)

Dividend History: 30+ years consistent

Value Investor Analysis:

Graham Number Calculation:
Book Value Per Share: ₹400
Graham Number = √ (22.5 × 51 × 400)
= √ (4,59,000)
= ₹677

Current Price: ₹380
Intrinsic Value: ₹677
Discount: 44% (!)

Value Investor Says: BUY! Margin of safety = 44%

What Happened After?

Timeline:

2024 (Value investor bought at ₹380)

2024-2025: Coal demand increased, government support

Coal India raised earnings 40%

Stock price rose to ₹500+

Value investor's ₹3,80,000 became ₹5,00,000+

Profit: ₹1,20,000+ (32% return!)

Top Undervalued Stocks in India 2025

Company	Price	P/E	Dividend Yield	Graham's Verdict
Coal India	₹380	7.4	7%	BUY (44% undervalued)
Power Grid	₹180	13.5	5.2%	BUY (defensive)
NMDC	₹74	9.3	4.4%	BUY (infrastructure play)
ITC	₹440	21	3.5%	HOLD (fairly valued)
ONGC	₹350	11	4.2%	BUY (oil recovery)

How to Start Value Investing (Step-by-Step)

Step 1: Build Your Watchlist

Visit Screener.in or Tickertape.in
Filter by: Market Cap >20,000 Cr, P/E <20, P/B <1.5
List 10-20 potential stocks

Step 2: Deep Research Each Stock

✓ Read 3-5 years annual reports
✓ Check dividend history (consistent?)
✓ Analyze balance sheet (low debt?)
✓ Study earnings trend (growing?)

Step 3: Calculate Intrinsic Value

Use Graham Number or P/E method
Compare with current stock price
Check for 30-40% margin of safety

Step 4: Buy at Discount

Only buy if trading 30-40% below intrinsic value
Start with small position (2-3% of portfolio)
Open demat + trading account if needed

Step 5: Hold Long-Term (10-20 Years)

Ignore short-term price fluctuations
Hold through market crashes
Reinvest dividends
Review annually but don't panic sell

Mistakes Value Investors Make

❌ Mistake #1: Buying at 10% Discount (Not Enough Margin)

Problem: Small error in calculation = loss
Fix: Always require 30-40% discount minimum

❌ Mistake #2: Ignoring Business Quality

Problem: Buying cheap stock of declining company
Fix: Ensure company has growth story + stable earnings

❌ Mistake #3: Over-Diversification

Problem: Buying 50 different stocks (can't track all)
Fix: Own 10-20 best ideas, concentrate investment

❌ Mistake #4: Selling Too Early

Problem: Stock rises 30%, you sell for profit, miss 200% gain
Fix: Hold quality stocks for 10-20 years minimum

Value Investing: Realistic Returns & Timeline

Realistic Expectations:

Typical Value Investor Portfolio (20 years):
Annual Return: 10-15%
₹1,00,000 becomes ₹6-26 crores

Undervalued Stock Examples:
Coal India @ ₹380 → ₹500 = 32% in 1 year
Power Grid @ ₹180 → ₹250 = 39% in 2 years

Key:** Not all undervalued stocks become winners. Maybe 60-70% do. That's why diversification matters!

Conclusion: The Buffett Way

Value Investing Core Principles:

✅ Buy good companies at cheap prices (not cheap companies!)

✅ Wait for 30-40% discount (margin of safety)

✅ Hold for 10-20 years (patience is key)

✅ Ignore market noise (don't panic sell during crashes)

✅ Diversify across 10-20 stocks (reduce single-stock risk)

Your Action Plan:

✓ Visit Screener.in today

✓ Filter stocks: Market Cap >20K Cr, P/E <20, P/B <1.5

✓ Pick 1 stock, download 3-year annual report

✓ Calculate Graham Number for intrinsic value

✓ If trading 30% below intrinsic, it's a BUY

✓ Open demat account, invest ₹10,000-20,000

✓ Hold for 10+ years, ignore market chaos

Warren Buffett's Famous Quote:

"The time to buy is when there is blood in the streets. Be fearful when others are greedy, and greedy when others are fearful."

💎 Buy Undervalued. Hold Forever. Become Wealthy Quietly!