What Is Value Investing?

From July 1926 to August 2026, the group of US stocks with the highest book-to-market ratio returned 12.5% a year, with dividends counted and before costs. The group with the lowest ratio returned 9.6% a year.

Value investing is the practice of buying stocks whose price is low against a measure of what the company is worth. This guide defines that measure. It traces the idea to Graham and Dodd's Security Analysis of 1934, then sets out the measurable sort researchers were testing by the early 1990s.

Value investing is a way of picking stocks. It compares a stock's price with a measure of what the company is worth. It favours stocks whose price is low against that measure.

A 1993 working paper from the National Bureau of Economic Research describes value strategies as ones that "call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value". Its authors are Josef Lakonishok, Robert Vishny and Andrei Shleifer.

A stock whose price is low against such a measure is a value stock. A stock whose price is high against it is a growth stock. This guide uses one measure, book-to-market, to draw that line.

The price-to-earnings ratio is another such measure. Momentum investing is a different idea: it ranks stocks on past returns.

Benjamin Graham and David Dodd published Security Analysis in 1934. This guide does not describe the method set out in that book, because no copy of the first edition was opened for it.

Estimating what a company is worth can be done company by company, from its accounts. Two analysts working that way can reach different answers for the same company, because the estimate rests on judgement. A published ratio removes that step.

Book value is the shareholders' stake as the company's accounts record it: assets minus debts. Market value is the share price multiplied by the number of shares, which is what the market currently pays for that stake.

Book-to-market is book value divided by market value. A company with book value of $50 million and market value of $100 million has a ratio of 0.5. If its share price halves and nothing else changes, the market value falls to $50 million and the ratio doubles to 1.0.

A high ratio therefore means the market pays little for each dollar of book value. A low ratio means it pays a lot.

In 1992 Eugene Fama and Kenneth French published "The Cross-Section of Expected Stock Returns" in the Journal of Finance. Its abstract begins: "Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns". In plain words, differences in average returns between stocks lined up with company size and book-to-market.

A ratio anyone can compute can be turned into a rule. Rank every stock on one published ratio, split the ranking into groups and measure each group's return. No analyst's estimate is needed. The sort can be repeated from published data.

The Kenneth R. French Data Library publishes the sort. Each June it ranks US stocks on book-to-market. It uses book value from the fiscal year that ended in the previous calendar year. Market value is taken at the previous December.

Companies with negative book value are left out of the ten groups.

The library sets the cut-off ratios between the ten groups using only stocks listed on the New York Stock Exchange (NYSE), so the groups hold unequal numbers of companies. Every stock with the data needed is then placed in a group by its own ratio. Each group is held from July to the next June, weighted by market value.

This is a backtest: a rule applied to past data. The returns count dividends and carry no deduction for trading costs, fees or tax.

The chart shows each group's yearly return from July 1926 to August 2026, 1,202 months, before costs. Group 10, the highest ratio, returned 12.5% a year and group 1, the lowest, returned 9.6%. All US stocks returned 10.4%. The gap between groups 10 and 1 is 2.9 points a year.

The pattern is not a straight line. Group 9 returned the most, 13.6%. Groups 4 and 7 each returned 9.8%, below the all-stock figure. Group 10 beat group 1 in 52 of the 99 calendar years from 1927 to 2025, so in 47 it did not.

The library also condenses the sort into one series. It splits US stocks by size at the median NYSE company and by book-to-market at the 30th and 70th NYSE percentiles. That gives six portfolios, three for small companies and three for big ones.

HML stands for high minus low. It is the average return of the two value portfolios minus the average return of the two growth portfolios. The value portfolios hold stocks with ratios above the NYSE 70th percentile. The growth portfolios hold stocks below the NYSE 30th percentile.

HML is a difference between groups of stocks. It is not a fund. Nothing is deducted from it for trading, borrowing stocks, fees or tax.

The chart shows the six portfolios from July 1926 to August 2026, before costs. The small value portfolio returned 14.3% a year, the most of the six. The small growth portfolio returned 8.9%, the least. Among big companies the spread was narrower: 12.5% for value against 10.3% for growth.

That 12.5% is a different portfolio from group 10 above, built from a different sort. The two land on the same figure to one decimal place.

HML compounded at 4.94% a year from July 1926 to December 2006, 966 months. From January 2007 to August 2026, 236 months, it returned −1.95% a year. Both figures are before costs. Quant investing for beginners shows the same factor decade by decade.

Book-to-market is one measure of value. The library also sorts stocks on earnings-to-price, cash-flow-to-price and dividend yield, so a stock can be a value stock on one measure and not on another.

A sort reports what a group did on average. It says nothing about any single stock inside the group. A group's average can hide a long stretch of loss.

All figures here come from US stocks, from one dataset and from returns before costs. Costs would normally lower them. The companion guide, Does Value Investing Still Work?, covers the record by decade, including the period since 2007.

Value investing was an estimate made company by company before it was a measurable sort. Researchers were testing the sort by the early 1990s.

In the ten-group sort, the highest-ratio group beat the lowest by 2.9 points a year over the full record, unevenly across the groups. HML, the spread used in the companion guide, fell 32.1% from January 2007 to August 2026.

This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

Value investing is buying stocks whose price is low compared with a measure of the company's worth, such as book value or earnings. The idea traces to Benjamin Graham and David Dodd's 1934 book Security Analysis. A measurable version sorts stocks on a ratio such as book-to-market.

The book-to-market ratio is a company's book value divided by its market value. Book value is the shareholders' stake in the accounts, which is assets minus debts. Market value is the share price times the number of shares. A high ratio marks a value stock. A low ratio marks a growth stock.

In the Kenneth R. French Data Library, value stocks have book-to-market ratios above the 70th percentile of NYSE stocks. Growth stocks have ratios below the 30th percentile. From July 1926 to August 2026, the big value portfolio returned 12.5% a year and the big growth portfolio returned 10.3%, before costs.

From July 1926 to August 2026, the highest book-to-market group of US stocks returned 12.5% a year against 10.4% for all US stocks, before costs. The result depends on the window. HML, a different measure that buys value and sells growth, fell 32.1% from January 2007 to August 2026, also before costs.

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.