Glossary · UK
What is Value Investing?
An investment strategy that targets shares believed to be trading below their true underlying worth, based on measures such as low price-to-earnings or price-to-book ratios.
Full Definition
Value investing is an investment strategy focused on identifying shares that appear to be trading at a price below their true underlying worth, using measures such as a low price-to-earnings ratio, a low price-to-book ratio, or a high dividend yield relative to the wider market or a company's own history, on the basis that the market has, for some reason, temporarily mispriced the company and its share price should eventually converge back towards its fundamental value. This contrasts with growth investing, which instead targets companies expected to grow their earnings rapidly in future and is often willing to pay a higher price today (measured by conventional valuation ratios) for that expected future growth, meaning the two approaches often favour different types of company and can perform very differently depending on which style is in favour with the wider market at any given time. Value investing has a long track record associated with well-known investors who built substantial wealth applying its principles over long periods, but it has also gone through extended periods of underperforming growth-focused approaches, particularly during periods dominated by rapidly growing technology companies, illustrating that no single investment style consistently outperforms in every market environment. Many diversified UK investors gain exposure to both value and growth styles simply by holding broad tracker funds covering the whole market rather than picking a single style, while others deliberately tilt their portfolio towards value or growth funds as part of a more active asset allocation strategy, accepting the risk that their chosen style may underperform the wider market for extended periods.