Why Tomorrow's Winning Stocks Won't Pass Today's Value Investing Test

The Paradox: Why Traditional Value Metrics Fail

Value investing has long been championed as the gold standard of stock selection. Warren Buffett himself declared that “the very term ‘value investing’ is redundant”—implying that all sound investing is, by definition, value investing. Yet here lies a fundamental contradiction: many followers of value investing principles would have systematically excluded one of the decade’s greatest performers—Nvidia.

The reason isn’t complicated, but it’s deeply revealing about how most investors approach their craft.

The Mechanics of Traditional Value Metrics

Traditional value investing relies on backward-looking metrics to determine if a stock is cheap. The most popular: the price-to-earnings (P/E) ratio. Picture two $50 billion companies—one earning $50 million annually (P/E of 1,000) and another earning $5 billion (P/E of 10). Value investors would consider the second a bargain, often preferring stocks trading below market averages.

The S&P 500’s average P/E hovers around 25. Anything above that gets labeled as overvalued by traditionalists.

In 2019, Nvidia traded with an average P/E ratio of 35—well above market average. By strict value investing doctrine, the stock was too expensive. It belonged on the “avoid” list, not the buy list.

Yet what followed over the next five years defied the traditional playbook entirely. Nvidia’s stock surged nearly 3,000%, while its earnings per share climbed even faster. The company now generates $100 billion in annual net income—meaning its entire valuation in 2019 essentially equaled a single year’s profits today.

The Flaw at the Heart of the Framework

The core problem reveals itself when you examine what these metrics actually measure: history. The P/E ratio, market cap, and similar tools are rearview mirrors. They tell you what a company earned last quarter or last year—useful context, certainly, but not predictive.

Yet investors must make decisions today with their money, hoping to deploy it in businesses that will generate superior returns tomorrow.

Buffett himself provided the corrective lens in that same 1992 letter: “Growth is always a component in the calculation of value.” This isn’t secondary. It’s foundational. Value investors ignore growth forecasts at their peril.

Consider Nvidia in 2019 through this lens. Its P/E looked expensive by historical standards. But that ratio was blind to what was coming—the explosive demand for AI infrastructure, the durability of that demand, and the company’s ability to capture massive market share at high margins.

For investors with conviction about these trends, Nvidia’s valuation wasn’t overpriced at all. The company’s future earnings potential made it a bargain.

Reconciling Past and Future

The lesson isn’t that P/E ratios are worthless. Rather, they’re incomplete without forward-looking conviction about a business’s trajectory.

The stocks that will deliver exceptional returns over the next decade may not resemble traditional value plays today. They might trade at premium multiples. They might have modest current earnings. But if their future growth justifies—or exceeds—that valuation, they will ultimately prove to be the greatest values of all, viewed through the lens of hindsight.

This is the mental shift that separates value investors who catch transformational opportunities from those who remain perpetual observers, watching from the sidelines as the market rewards companies they deemed too pricey to understand.

The real skill in value investing isn’t in reading spreadsheets. It’s in envisioning where the world is headed, positioning accordingly, and having the conviction to act when traditional metrics suggest caution.