Value Investing vs Index Investing (Which is Better Long-Term?)

In 2013, Warren Buffett, the man who turned every thousand dollars invested in his company back in 1964 into more than $50 million today, wrote something strange into his will. He told the trustee managing money for his wife to do something almost boring, put 90% of it into a plain, ordinary S&P 500 index fund. The other 10%, short-term government bonds. No stock picking. Not trying to find the next great company. Nothing fancy at all. Why would the greatest stock picker alive tell his own family to skip the thing that made him rich? That question is basically the whole video. Today we're looking at two of the biggest investing philosophies out there. Index investing and value investing. What they actually are, how they've really performed with real numbers, and why understanding the difference matters more than most people think. Welcome to Martik Finance, where we explain investing concepts in a simple way. But first of all, a quick disclaimer. This is not financial advice. Let's start with index investing, because it's the simpler of the two. An index fund doesn't try to pick winners. It just buys a little bit of everything in a given market, in the same proportions as that market. If you buy an S&P 500 index fund, you now own a tiny slice of all 500 of the biggest companies in the US, from Apple to a random industrial parts maker you've never heard of. There's no manager sitting in an office deciding what to buy or sell. It's mostly automated. It just tracks the index. Because of that, the fees are tiny. Some of the big S&P 500 funds charge less than 0.1% a year to manage your money. The whole idea behind index investing is simple. You're not betting on any single company. You're betting on the economy as a whole going up over time. And historically, it has. Value investing works completely differently. Instead of buying everything, a value investor is trying to find specific companies that are priced lower than what they're actually worth. Think of it like finding a house listed under market price because the seller doesn't realize what they have. The company itself might be fine, even great, but for whatever reason, the stock price hasn't caught up to that yet. This approach goes back to a professor named Benjamin Graham in the 1930s who more or less invented the discipline. He taught his students to look at a company's actual numbers, its earnings, its assets, its debt, and figure out what it's really worth. Then compare that to the stock price. If the price is well below the real value, that's your opportunity. One of Graham's students at Columbia was a young guy named Warren Buffett. And Buffett took that idea and built an entire empire on it through his company Berkshire Hathaway. Here's something worth knowing before we get into the numbers, because it's a big part of why value investing still has appeal today. There is a simple way to check whether a stock or a whole index looks expensive. It's called the price-to-earnings ratio. It just tells you how many dollars you're paying today for one dollar of that company's yearly profit. The higher the number, the more you're paying for the same dollar of earnings. Right now, the S&P 500 is trading at a price-to-earnings ratio close to 30. Its long-term historical average sits closer to 20. So today, you're paying noticeably more for the same slice of company profits than investors typically have paid in the past, largely because a small handful of huge tech companies have gotten very expensive and now make up a big chunk of the index. That's exactly the kind of thing that makes some investors nervous about buying the index blindly right now. If the overall market looks pricey, deliberately looking for companies that are still reasonably priced instead of buying everything at today's price can feel like the safer move. Whether that actually plays out is a different question, and that's exactly what the data in the next section is about. Let's start with Buffett, since he's the poster child for value investing. From 1964 through 2024, Berkshire Hathaway compounded at just around 20% a year. The S&P 500, over that same stretch, compounded at about 10% a year. It sounds like a huge gap, right? And compounded over 60 years, that gap turns $1,000 into $56 million with Berkshire, versus around $304,000 with the index. That's the power of compounding effects over a very long period of time. So after looking at the data, most people would think value investing is much more profitable. However, Buffett is one guy, running one company for 60 years, doing something almost nobody else has been able to repeat. And there's a second piece of data that matters a lot more for the average investor, what happens when regular fund managers try to do what Buffett does. Every year, S&P Dow Jones publishes a report that tracks how actively managed funds perform against their benchmark index, and the results are rough for stock pickers. In 2025, 79% of large-cap funds underperformed the S&P 500, and this isn't just a one-year phenomenon. So, the message here is simple, beating the S&P 500 consistently is extremely difficult, even for professional fund managers. Now let's zoom out and look at value as a whole, compared to its opposite, growth investing, which means buying companies expected to grow fast, even if they look expensive today. If you look at academic data going back to 1926, value stocks as a group have actually beaten growth stocks over the very long run. But here's the twist, over roughly the last decade, that pattern flipped hard. Value stocks returned somewhere around 10% a year, while growth stocks, driven largely by big tech, and now AI-related companies, returned closer to 14 or 15% a year. So depending on which decade you happen to be investing in, either style could look like the obvious winner. So how do you actually put either of these into practice? Index investing is the easy one to explain. You buy a fund, something like a total US stock market fund, or an S&P 500 fund, from a big provider like Vanguard. You're not picking anything, you just keep buying it over time, and let it track whatever the market does. Value investing has a few real paths, and they're pretty different from each other. The most common way regular people get value exposure is through value mutual funds, or value ETFs. These are run by professional managers, whose whole job is applying Graham-style principles, looking at a company's financials, figuring out what the business is actually worth, and buying it when the price sits well below that. You're not doing the analysis yourself, you're paying someone else to do it, usually for a higher fee than a plain index fund. Then, you'll also sometimes come across something called a value index fund. It sounds like a contradiction, and honestly, it kind of is. Instead of a human picking anything, it's a rules-based formula that automatically buys companies with low prices relative to their earnings or assets. No judgment involved, just a mechanical screen. The companies that score more like value stocks are included in the index. But the important part here is that value doesn't necessarily mean cheap. The index is not saying something like, only buy companies with a price-to-earnings ratio below 15. It's ranking companies relative to the other companies in its universe, and once those companies are selected, they're generally still weighted largely by market capitalization. So a massive company can have a large weight in a value index, even if its valuation doesn't look extremely cheap. That's why often value index funds can still have a relatively high average price-to-earnings ratio, which is not really following Benjamin Graham's principles. However, management fees tend to be really cheap, as there is no manager behind the fund. Then, there's doing it yourself. Actually digging into individual companies, reading their financial statements, and picking stocks the way Graham taught. This is the riskiest path by a wide margin. It takes real time, real financial literacy, and a level of discipline that's hard to hold on to when a stock you bought keeps dropping. And remember that data from earlier. If professional fund managers, doing this full-time with entire teams of analysts, mostly fail to beat the index, someone picking stocks on the side is taking on a lot of risk for a strategy that's genuinely difficult to pull off well. And finally, there is the Warren Buffett's version of value investing, which brings us back to Berkshire Hathaway. Buying a share of Berkshire isn't quite the same as buying into a fund in the legal sense. It's an actual operating company, one that owns other businesses outright, and also holds a massive stock portfolio, and its managers use the company's cash to buy undervalued businesses, the exact same principles Graham taught, just applied at an enormous scale. So when you buy a share of Berkshire, what you're really doing is handing your money to a team built entirely around value investing, and letting them make the decisions instead of you. So, back to that will. Why does Buffett, of all people, tell his own family to just buy the index? Because he knows the difference between what worked for him personally, and what works for almost everyone else. He had decades of full-time focus, a small army of analysts, and access to deals regular investors simply can't get. Most people don't have that. What most people do have is a day job, limited time to research individual companies, and a strong tendency to make emotional decisions at exactly the wrong moment. For someone like that, a low-cost index fund removes almost all the ways you can mess up. You can't pick a bad stock if you're not picking stocks. You can't panic-sell your favorite company if you don't have one. Value investing can absolutely work, and the long-term data backs that up. But it demands real time, and it can go through long stretches, sometimes a full decade, where it lags behind the simpler approach. Honestly, plenty of experienced investors don't pick one or the other. They hold a core of index funds for stability and simplicity, and then use a smaller portion of their portfolio to try value picks, or a value-focused fund. Best of both, without betting everything on either one. If you found this video helpful, don't forget to like, subscribe, and comment below what you would like to see next in the channel. Thank you so much for watching, and I'll see you in the next one. Bye.