Value investing, the investment act that buys cheap asset and sells expensive assets, has historically posted abnormal returns. The name of value investing is formally coined by Benjamin Graham and David Dodd through their influential publication- Security Analysis.

As one of the founders and advocators of value investing, Graham is perhaps more famously known as the teacher of the legendary investor Warren Buffett. Although value investing has been proven to be a profitable long-term investment strategy, many argue that the principle of value investing alone does not explain the outsized returns realized by Buffett. Lasse H. Pedersen from AQR made a good point on this in his post ‘The Legacy of Graham and Dodd‘. Their analysis reveals that the success of Buffett’s investment can be explained by four key principles: (1). value investing: which is the act of buying cheap and selling expensive; (2). quality investing: which is to invest in growing and profitable firms; (3) low risk investing: as average investor is leverage averse, they tend to invest in high-risk names to boost up returns, which leaves low risk names to be relatively cheap. (4). Moderate use of leverage: Buffett applies moderate leverage (1.6 to 1) in his investments to boost up returns, through his insurance, reinsurance companies, bond issues and deferred taxes.