In crypto investment chat groups, the term "value investing" often appears as a self-mocking joke. When an investor faces significant losses, they might say, "Well, I guess it's time for value investing now." Others may respond with sympathy or humor, lightening the mood.
Sometimes, value investing seems like a fleeting trend—now praised, now dismissed as worthless, declared dead, only to revive again later.
A quick search for "value investing" reveals many similar conversations. Occasionally, we meet someone who identifies as a "value investor." When asked to define it, they often mention "long-term holding" and "patience." However, these concepts only scratch the surface of value investing’s true meaning.
What Is Value Investing?
Value investing is straightforward in theory but more complex in practice. Its origins trace back to Benjamin Graham, the American securities investment master, and his foundational book, Security Analysis. The approach emphasizes analyzing the intrinsic value of stocks to determine their investment worth.
Later thinkers like Philip Fisher, Charlie Munger, Seth Klarman, and Howard Marks expanded these ideas, building a rich framework. Yet, it was Warren Buffett—with over 50 years of stellar investment performance—who popularized value investing worldwide.
So, what is value investing? Some say it’s about "buying a dollar for forty cents"—acquiring assets below their intrinsic value. While accurate, this describes the outcome, not the process. The real challenge lies in consistently identifying such opportunities.
The Four Cornerstones of Value Investing
Value investing rests on four key principles, which we call its "cornerstones":
- Buying Stocks Is Buying Companies
- The Circle of Competence
- Margin of Safety
- Mr. Market
These concepts form the core of value investing. Understanding, accepting, and applying them means embarking on the value investing path.
Let’s explore each in detail.
1. Buying Stocks Is Buying Companies
A stock’s value comes from its representation of ownership in a company. Companies hold value because they generate profits and cash flow. Thus, buying stock means acquiring a share of the company’s future cash flows. The ownership’s worth depends on the total cash flow the company will create over time.
This introduces the idea of intrinsic value: the sum of all future cash flows a company will generate, discounted to their present value.
Discounting converts future asset values into today’s terms. For example, $10 received ten years from now might be worth $5 today—that $5 is the present discounted value.
2. The Circle of Competence
Your circle of competence includes assets you truly understand and about which you possess insights surpassing most market participants. While easy to grasp, this concept challenges our self-awareness. People often overestimate their knowledge.
Staying within your circle minimizes risks and leverages your strengths.
3. Margin of Safety
This principle is common in daily life. For instance, a bridge designed to hold 20 tons might only allow 15-ton vehicles—the extra 5 tons is the margin of safety.
In investing, it means buying stocks below their intrinsic value—Buffett’s "forty cents for a dollar." This buffer protects against errors, bad luck, and market volatility. A larger margin means more room for mistakes and lower loss risk.
4. Mr. Market
Graham’s "Mr. Market" allegory illustrates market behavior. Imagine a business partner who offers daily to buy your shares or sell you his. His moods swing wildly: some days he’s euphoric and quotes high prices; other days he’s pessimistic and offers low ones. He doesn’t mind being ignored—he’ll return tomorrow with new quotes.
Mr. Market provides price quotes, not wisdom. His emotions can create opportunities if ignored or exploited. But following his lead blindly spells disaster.
Price is what you pay; value is what you get.
Combining these ideas, value investing means: within your circle of competence, buying assets below their intrinsic value with a sufficient margin of safety.
Simple in definition, challenging in execution.
- "Choosing within your circle" requires unbiased self-assessment—hard due to natural overconfidence. Expanding your circle is necessary but must be gradual; too slow, and you miss opportunities; too fast, and you gain shallow knowledge.
- "Buying below intrinsic value" demands the ability to measure true worth, including intangible strengths like network effects, switching costs, brand value, and cost advantages.
- "Adequate margin of safety" reduces opportunities—missing out on correct picks can hurt more than losses.
Throughout, Mr. Market tempts you: urging hold during rallies and sell during crashes. He’s sometimes right, often wrong—but always influencing if you watch.
Each principle requires discipline. Easy to know, hard to practice.
Applying Value Investing to Crypto
Warren Buffett and Charlie Munger famously dislike crypto assets, with Buffett calling Bitcoin "rat poison." Still, we believe value investing applies to crypto.
Buffett avoids Bitcoin and gold because they "produce nothing." Yet he invested in Barrick Gold, a gold mining company, for its cash flow. Were he younger, he might invest cash-flow-positive crypto projects with strong moats.
Value investing’s cornerstones adapt well to crypto: buying tokens is buying projects, circle of competence, margin of safety, and Mr. Market.
Let’s see how, with examples.
1. Buying Tokens Is Buying Projects
A token’s value stems from its project’s ability to provide value and capture revenue. From a value investing perspective, worthwhile crypto projects should have:
a. Tokens that capture most economic value created.
Some products have large user bases but don’t transfer value to their tokens. For example, crypto wallets may have high activity, but their tokens have small market caps because the value isn’t captured.
b. Solving significant problems in broad, long-lifecycle sectors.
Tornado Cash met a niche need (money laundering) but has limited scale. Lending, trading, and derivatives serve healthier, longer-term markets.
c. Excellent management teams.
Some early projects in good sectors fail due to weak teams, like BSC’s BurgerSwap being overtaken by rivals.
2. Circle of Competence
As Charlie Munger said, "If I know where I’m going to die, I’ll never go there." Major losses occur where we think we understand but don’t.
How to know if you "get it"? Two standards:
- Your knowledge surpasses 90% of investors in that project.
- Others rarely mention information or angles you haven’t considered.
Falling short means it’s not for heavy bets.
3. Margin of Safety
This requires estimating a "fair price" and buying at a discount. Accurate valuation is tough in crypto, especially for blockchains. Even DeFi protocols with clear cash flows are hard to value via DCF models due to uncertainties like lifespan and growth rates.
Relative valuation offers a practical alternative. We might not compute exact values, but we can spot obvious bargains—like recognizing a胖子 without knowing his weight.
👉 Explore valuation strategies for crypto assets
4. Mr. Market
Stick to the first three principles and remember: Mr. Market’s quotes are useful; his wisdom isn’t. Prices reflect votes, not truth.
When applying value investing to crypto, ask four questions before trading:
- Is this a good project in a good sector? (Buying tokens is buying projects)
- Do I truly understand it? (Circle of competence)
- Does the price include a margin of safety? (Margin of safety)
- Am I using the market or being used by it? (Mr. Market)
Questions 1 and 3 address ignorance; 2 and 4 counter human weakness. These are the only reasons for major losses.
When to Sell in Value Investing?
Sell under two conditions:
- The investment thesis breaks.
Examples: sector competition intensifies, moats prove shallow, or management shows incompetence or dishonesty. - The price rises too high, offering low potential returns.
Switch to better opportunities. Investing involves constant comparison—even holding cash is an investment (like a 2% yield bond via money funds).
Value investing isn’t the only way in crypto. Some profit from technical analysis or narrative trends. But these involve stiff competition and reflexive market changes that invalidate past rules.
Most importantly: Is it within your circle of competence?
Frequently Asked Questions
What is the main goal of value investing in crypto?
The goal is to identify undervalued crypto projects with strong fundamentals and long-term potential, purchasing their tokens at prices below intrinsic value to achieve sustainable returns.
How can I determine my circle of competence in crypto?
Focus on sectors or projects where you have deep knowledge, can assess key factors like tokenomics and team quality, and stay updated on developments. Avoid areas where your understanding is superficial.
Why is margin of safety important in volatile crypto markets?
Crypto markets are highly unpredictable. A margin of safety buffers against errors, market swings, and unforeseen events, reducing the risk of permanent capital loss.
Can value investing work for short-term crypto trading?
Value investing is inherently long-term. Short-term trading relies more on technical analysis and market sentiment, which conflict with value investing’s core principles of intrinsic value and patience.
How do I avoid emotional decisions in crypto value investing?
Stick to your predefined criteria for buying and selling. Ignore Mr. Market’s mood swings, and base decisions on fundamental analysis rather than price movements or social media hype.
Are there any tools for calculating intrinsic value in crypto?
While exact calculations are challenging, you can use relative valuation metrics, compare similar projects, and analyze cash flows or revenue generation. 👉 Access tools for crypto fundamental analysis