Value Investing Framework For 2026

Value Investing in 2026: A Search for Absolute Returns

Key Concepts: Value Investing, Absolute Returns, Relative Returns, Margin of Safety, Structural Tailwinds, Dividend Yield, Owners Earnings, Cyclical Downturn, Small-Cap Stocks, AI/Cloud Technology, Cash Deployment.

Market Overview & Valuation Concerns

The speaker begins by outlining a challenging landscape for value investors heading into 2026. Global markets, particularly in the US and Europe, are currently at all-time highs with “crazy high” valuations. Historical precedent suggests that similar valuation levels were followed by a decade of 60% negative real returns. Bonds offer no real return, leading to a loss of purchasing power, and governments are continuing to print money despite inflation remaining below target (and recently exceeding 3%). The speaker notes a disconnect between fundamentals and market behavior, citing Bitcoin as an example of an asset with price driven by factors other than underlying value (“spent energy”). Current yields are at historical lows, historically a precursor to lower long-term returns.

The Shift in Market Exposure & The Need to Look Elsewhere

Analysis of the S&P 500 and iShares ETFs reveals significant exposure to Information Technology, AI, Financials, and Communication Services – collectively exceeding 50%. This concentration suggests that opportunities may lie in areas currently being overlooked or discarded by the broader market. The speaker emphasizes the need to “look when others aren’t looking.”

Absolute vs. Relative Value – A Core Distinction

A crucial distinction is made between relative and absolute value investing. While a 4% dividend yield may be relatively attractive compared to the S&P 500’s 1%, a true value investor seeks absolute returns – specifically, 6-10% owner’s earnings growth plus free growth. The speaker uses ADM as a case study. While ADM’s stock performed adequately after a purchase discussed earlier in the year, the dividend yield decreased from 5% to 3%, highlighting the importance of initial absolute value. The speaker suggests that a combination of 5% dividend yield and 5% inflation growth represents a desirable absolute return.

Patience & The Value of Waiting

The central argument revolves around the importance of patience in value investing. The speaker reframes the question of “where to find absolute value now” to “focus and then waiting for that value to come to you.” Chasing value in the current market is deemed counterproductive. The speaker states, “If I find one new value over the next 12 months, I would be very happy.” He highlights Warren Buffett’s strategy of holding substantial cash reserves (short-term cash) as a potential value play in itself, acknowledging that even Buffett has experienced losses from waiting for corrections.

The Role of Cash & Market Cycles

The speaker directly addresses the criticism that value investing only works during market crashes, stating, “No, I want to invest whatever happens.” He points to Buffett’s historical success in deploying cash effectively when the time was right. He suggests a 50% market decline is a reasonable expectation for a value investor, likening the approach to a “real value crocodile” that waits patiently.

Geographic Focus & Small-Cap Opportunities

Given the high valuations in the US, the speaker identifies Europe and the UK as primary areas of focus for 2026, particularly in the small-cap segment, which often falls outside of Buffett’s investment scope due to the scale required for meaningful deployment (10-50 billion dollars). Emerging markets are considered potentially mixed, while Japan is deemed unlikely to offer significant value.

In-Depth Research & Structural Tailwinds

True value investing in the current environment requires “in-depth research on overlooked small caps.” The speaker cites CH Industrial in the UK as an example – currently in a cyclical downturn, but poised for a potential 50% rebound with high dividend yields, offering a potential 10-15% return. The key is to build a list of 50 potential value opportunities with “positive structural tailwinds” and “good businesses that reward you as an owner,” ensuring a “margin of safety” – the ability for the investment to withstand further declines.

The Research Platform & Final Thoughts

The speaker promotes his research platform (link in description) as a resource for identifying potential value opportunities. He concludes by encouraging viewers to invest in the platform as a “gift for 2026” and emphasizes the ongoing provision of educational content on his YouTube channel.

Notable Quote:

“Value investing works only in crash. No, I want to invest whatever happens.” – The speaker, challenging the common perception of value investing as solely a crash-driven strategy.

Technical Terms:

• Real Returns: Investment returns adjusted for inflation.
• Owners Earnings: The profit available to the owners of a company after all expenses, including capital expenditures, have been paid.
• Margin of Safety: The difference between the intrinsic value of an asset and its market price, providing a buffer against errors in valuation.
• Structural Tailwinds: Favorable long-term trends that support the growth of a business.
• Cyclical Downturn: A temporary decline in a business’s performance due to economic or industry-specific factors.

Synthesis/Conclusion:

The core takeaway is that finding true value in the current market requires a disciplined, patient approach focused on absolute returns, in-depth research, and a willingness to look beyond popular sectors and geographies. The speaker advocates for a long-term perspective, building a diversified list of potential investments, and waiting for opportunities to arise rather than chasing inflated valuations. Cash, while potentially costly in the short term, can be a valuable asset in a high-valuation environment.