• What does value investing mean today?
• How do I recognize a value trap?
• What role does diversification play for value investors?
• Conclusion: Is value investing still up to date?
   

At its core, value investing means identifying undervalued assets and profiting from their intrinsic value over the long term. Value investors specifically look for shares that appear cheap based on fundamental indicators such as the price/earnings ratio (P/E ratio) - the ratio of share price to annual profit. However, the classic approach of simply buying the shares with the lowest P/E ratios has disadvantages. It tends to favor certain sectors or regions that have permanently low valuation ratios for structural reasons, and such cluster risks can make the portfolio one-sided. Today, value investing means much more than just a low P/E ratio. Modern value investors compare companies not just on the basis of individual value criteria, but holistically. This means that instead of blindly looking at a single key figure, several benchmarks are used and only companies of a similar type are compared. For example, shares in the same sector are compared with each other in order to take account of differences in business models and the market environment. In addition, quality aspects are often included in the analysis - such as solid balance sheets, low debt or sustainable earnings power - so that "cheap" is not equated with "weak". In short, value investing remains a convincing concept, but today it requires a more differentiated approach than in the past. Without thorough analysis, you run the risk of falling into a so-called value trap an investment that only appears to be cheap and disappoints in the long term. 

The term "value trap" refers to a share that looks cheap but is actually fundamentally weak. Such stocks often have a low P/E ratio or similar key figures because their business model has underlying problems. This is also known as "cheap for a reason". Typical warning signs of a value trap include excessive company debt, declining sales or persistently low profit margins. A company may appear to be good value, but if it has structural difficulties or is operating in a stagnating sector, there is either a risk that the share price will continue to fall despite a low valuation or may not move for years.

To identify a value trap, it is therefore not enough to only look at the price. You have to analyze the overall picture. Fundamental analysis is essential: What does the balance sheet reveal? Is the company financially sound or is the debt ratio alarmingly high? Is the business still competitive, and how are sales and profits developing? A look at the share price performance can also help: If the share price is in a negative trend (momentum), this may be a sign that the market is already anticipating problems. Value investors should therefore always look behind the scenes. Factors such as price momentum, debt and profitability need to be examined in order to assess whether a share is rightly valued at a low price or whether the market may be overreacting. This avoids investing in supposedly "cheap" stocks that then become a trap due to a lack of fundamental upside potential. Those who consistently avoid such value traps and only invest in substantial companies with solid business models create the basis for long-term success. But even then, one question remains: how do you protect your portfolio from unforeseen setbacks? This is where diversification comes into play.

Diversification means spreading risk - i.e. spreading capital across different investments, sectors and markets so as not to be dependent on the performance of individual positions. Diversification is particularly important for value investors. A strategy that focuses strictly on "cheap" shares can otherwise lead to concentration risks. A broadly diversified portfolio, on the other hand, is usually more robust: fluctuations (volatility) are lower, as losses in individual stocks can be offset by stability in others. Moreover, different sectors and asset classes often react differently to economic changes. A value investor can better adapt their portfolio to changing market phases through a clever distribution - for example across different sectors and regions. Diversification thus ensures more stable returns and prevents performance from being dominated by a few factors. 

It is important to achieve true diversification and not just hold a large number of positions. Naive diversification - i.e. a portfolio with a large number of shares that are all dependent on the same trend - offers no real protection. The mix of uncorrelated investments is crucial. Value investors should make sure that they do not predominantly buy stocks from just one sector or with the same risk profile, even if they appear to be cheap at the time. This is because "value" is not a question of sector or country: if you look closely, you will also find value stocks in booming countries or sectors, e.g. in the technology sector. Weighting is also important: No single stock or small group of stocks should have an excessive influence on the overall portfolio. For example, a portfolio in which the top 10 positions together account for half of the value is susceptible to cluster risks. It is important to counteract this by limiting the size of positions and regularly checking whether unwanted focal points have crept in. 

However, even the best diversification cannot eliminate all risks. In severe market crises, correlations between investments often increase. Different values fall at the same time and a broadly diversified portfolio cannot completely escape the downward trend. Nevertheless, diversification usually cushions such slumps and reduces the risk of suffering excessive losses from the performance of individual favorite stocks, sectors or regions. Another advantage of a flexible, diversified approach is independence from rigid benchmarks. Benchmark dependency means being tied to a benchmark index. Many funds and ETFs have to track an index and can hardly avoid it if the underlying index has high concentration risks in a few stocks. By properly diversifying their portfolio, value investors can reduce individual risks and achieve more consistent results over the long term. With this robust positioning, they are well equipped. But the central question remains as to whether the value approach as such still promises success today. 

Looking at the developments of recent years, the answer is: yes, value investing is still relevant today - if it is practiced in a contemporary way. The fundamental principles of value investing have not lost their validity. It is still about identifying undervalued high-quality companies and waiting patiently for their value to be realised. In fact, changing market conditions, such as the end of the zero interest rate era, are once again providing a tailwind for value stocks: In an environment of higher interest rates and increased volatility, investors are once again focusing more on stable earnings and solid balance sheets. The comeback of value stocks observed in 2022 has shown that the market does recognize undervaluations in the long term and corrects them in phases. Value investing is alive and well. And it remains a sensible building block in a balanced investment concept. However, successful value investing today requires more discipline, patience and a holistic view than ever before. Investors should not expect to achieve maximum profits overnight with a value strategy. Rather, the strength of this approach lies in the long-term increase in value and resilience in difficult times. In order to assess the success of a value strategy fairly, one should look at periods of at least ten years or more. This is the only way to include various market cycles. The past is not the same as the future: a temporary underperformance does not mean the end of the value approach, just as a short-term excess return is not automatically sustainable in the long term. The decisive factor is the risk-adjusted view: What risks had to be taken in order to achieve a certain return? Does the performance match the investor's own risk profile? As a rule, value investing is characterized by a more balanced risk/return ratio than aggressive growth bets — which suits institutional investors in particular who value reliability. Finally, the mental component cannot be overlooked: value investors need staying power. It is important to endure temporary price setbacks without throwing the strategy overboard. Those unwilling to tolerate interim losses will struggle to adhere consistently to a value philosophy.. Perseverance is often rewarded — because genuine corporate values usually prevail in the long term. If you have a convincing, modern value investment, you can confidently take advantage of market weaknesses to add to it and thus achieve further excess returns. In short, value investing is not a relic of the past,. When applied correctly — with thorough analysis, avoidance of value traps and broad diversification — the value approach remains relevant and attractive for investors who want to build up assets sustainably, even in today's market environment.