Buffett Philosophy, Quantified: Buying Quality at a Reasonable Price

• Date : October 08,2025

What is Value Investing?

Value investing is identifying and buying companies that are trading below their intrinsic value. Value Investors typically use metrics such as the Price-to-Earnings (P/E) ratio, Price-to-Book (P/B) ratio, Dividend Yield, Price-to-Earnings to Growth (PEG) ratio etc. The belief of investors here is simple: that markets may misprice certain stocks in the short run, but over time, value is recognised, and prices revert toward their fair value. 

Many investors chase low valuations, hoping for quick gains, only to discover that not all undervalued stocks are truly valuable. In today’s fast-changing markets, simply buying cheap stocks isn’t enough.

The Evolution of Value Investing

Benjamin Graham, often called the father of value investing, believed investors should buy stocks below their true worth, creating a margin of safety to protect against market uncertainty. His philosophy focused on understanding a company’s real value rather than reacting to market sentiment.

Warren Buffett later added to this foundation, showing that cheap stocks aren’t always good investments. He emphasised buying high-quality businesses with strong fundamentals and enduring competitive advantages.

Investors are now recognising that true value investing balances quality with the price. This shift reflects the evolution of value investing into QARP investing, where investors look for a perfect blend of quality, price, and patience. However, in India, investors have long preferred low P/E and low P/B stocks for their perceived safety and potential re-rating.

The ‘Value Trap’: When Cheap Isn’t Cheerful

A value trap is often a stock that looks cheap at first glance but stays that way for all the wrong reasons, be it weak fundamentals, poor governance, or structural decline. Many investors buy these stocks expecting a turnaround or hoping for a P/E re-rating, but in most cases, that recovery never really happens.

Portfolio	Annualised Volatility (%)	Maximum Drawdown (%)	5-Year Loss Probability (%)
Value Traps	26.62	-81.33	24.95
Low Value Portfolio	23.45	-70.98	5.16

Source: CMIE, NJ Asset Management Private Limited Internal Research, and NJ’s Smart Beta Platform (an in-house proprietary model of NJAMC). Calculations are for the period 30th September 2006 to 31st August 2025. Value Traps represents the bottom tercile stocks based on Quality from the top 100 undervalued (lowest PE) stocks within the Nifty 500 universe. Past data may or may not be sustained in the future and is not an indication of future return.

The result of falling in the value trap is steeper drawdowns and poor risk-adjusted returns, reminding investors that low valuation alone isn’t enough; quality matters just as much. Understanding the difference between a value trap and a quality company trading at an attractive valuation is what defines successful QARP investing in modern markets.

But investing in businesses with sound balance sheets, steady cash flows i.e. quality companies often comes at a cost. Strong businesses often trade at a premium, and that’s usually justified because they bring consistency, resilience, and reliability. According to the data below, quality companies come with a premium.

Portfolio/Index	5 Year Average PE
NJ Quality+ Portfolio	47.77
Nifty 500	26.42

Source: NSE, NJ Asset Management Private Limited Internal Research, and NJ’s Smart Beta Platform (an in-house proprietary model of NJAMC). As of 30th September, 2025. NJ Quality+ Model is in-house proprietary methodology developed by NJAMC. These methodologies are dynamic in nature and will continue to evolve with ongoing research and insights, and may be updated from time to time. Past data may or may not be sustained in the future and is not an indication of future return.

That balance between value and quality stocks is what helps investors build sustainable long-term portfolios that can endure market cycles. Looking at Quality matters in value investing because it helps investors focus on businesses that are not only attractively valued, but also built to grow and endure over the long term.

Enter QARP: Where Value Meets Quality

Quality at a Reasonable Price (QARP) brings together the careful approach of value investing and the stability of quality businesses, creating a strategy that’s both practical and resilient. It helps investors steer clear of two common traps: the “broken cheap” companies that look inexpensive but lack strength, and the “overpriced elite” that come with heavy expectations and limited upside.

In simple terms, QARP is where reasonable price meets reliable quality, a space where solid fundamentals support long-term growth potential. It’s about owning great businesses at a good price. The data below clearly demonstrates that QARP delivers superior returns while Value Traps lags.

Portfolio	Annulised Return (%)	Sharpe Ratio	Median Rolling Return (%)
			1-Year	3-Year	5-Year	10-Year
QARP	21.30	0.63	18.19	24.46	20.89	21.65
Overvalued Quality	17.04	0.50	14.89	19.67	15.83	16.77
Pure Quality	19.53	0.60	16.22	21.45	19.37	19.80
Pure Value	15.60	0.38	14.03	16.51	11.85	13.65

Source: CMIE, NJ Asset Management Private Limited Internal Research, and NJ’s Smart Beta Platform (an in-house proprietary model of NJAMC). Calculations are for the period 30th September 2006 to 31st August 2025. QARP and Overvalued Quality represent the top and bottom tercile stocks based on Valuation from the NJ Quality+ Model (here referred to as Pure Quality). Pure Value represents the Top 100 stocks based on PE from the Nifty 500 universe. NJ Quality+ Model is an in-house proprietary methodology developed by NJAMC. These methodologies are dynamic in nature and will continue to evolve with ongoing research and insights, and may be updated from time to time. Past data may or may not be sustained in the future and is not an indication of future return.

Conclusion

QARP marks the natural evolution of value investing, a space where quality is essential and discipline drives every decision. True value investing isn’t about chasing the cheapest stock on the market; it’s about finding well-run businesses with strong fundamentals that are still available at reasonable prices.

At NJ Asset Management, our 100% rule-based, data-driven approach reflects this very philosophy. We focus on identifying undervalued opportunities within a quality universe, aiming to build portfolios that balance growth, stability, and long-term wealth creation.

Because in the end, as Warren Buffett famously said, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That timeless wisdom perfectly captures what QARP is all about: investing with patience, purpose, and conviction.

FAQs:

1) How is QARP different from traditional value investing?
Traditional value investing focuses primarily on low valuations. QARP ensures that these low valuations come with strong fundamentals that ensure investors avoid value traps.

2) Does QARP mean avoiding high P/E stocks altogether?
Not necessarily. QARP seeks value within quality, which sometimes means paying a fair price for a strong company. The focus is on justified valuations, not merely low numbers.

3) Can QARP help reduce investment risk?
Yes. By avoiding both overvalued quality stocks and cheap low-quality stocks, QARP portfolios typically demonstrate lower drawdowns and better risk-adjusted returns over time.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

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