Tomorrow's Winners Won't Look Like Traditional Value Stocks Today

The Paradox That Stumped Value Investors

When Warren Buffett wrote to Berkshire Hathaway shareholders in 1992, he made a striking observation: “We think the very term ‘value investing’ is redundant.” His message was clear—all intelligent investing is, at its core, about finding value. Yet despite this wisdom, countless investors have systematically rejected opportunities that turned out to be among the greatest wealth generators of our era.

Consider this uncomfortable truth: Nvidia (NASDAQ: NVDA) traded at a P/E ratio of 35 in 2019—significantly above the S&P 500’s average of around 25. By conventional value-investing standards, the stock was overpriced. Most traditional value investors would have walked away. And yet, this “expensive” stock would go on to deliver returns exceeding 3,000% over the following five years, making it the best-performing large-cap stock of the past decade.

How could something perceived as expensive become the bargain of the century?

The Fundamental Flaw in Backward-Looking Metrics

The answer reveals a critical blind spot in how many investors approach value. Most rely on financial metrics that measure the past. The P/E ratio, while popular, compares a company’s market value against its historical earnings. It answers one question well: Is this company cheap relative to what it has already earned?

But here’s the problem: You buy stocks today, not yesterday.

Take two hypothetical companies, both valued at $50 billion. Company A earns $50 million annually, resulting in a P/E of 1,000. Company B earns $5 billion, producing a P/E of 10. By traditional metrics, Company B looks 100 times cheaper. But what if Company A is on the cusp of explosive growth, while Company B faces stagnation? The cheap stock might remain cheap for good reasons.

This was the Nvidia dilemma. In 2019, the company’s market cap was approximately $100 billion. Its P/E ratio of 35 made it look pricey to anyone focused solely on past performance. But investors with forward-looking vision saw something different: a company positioned to capture the massive buildout of artificial intelligence infrastructure.

The evidence vindicated that forward-looking approach. Over the past year, Nvidia generated $100 billion in net income—meaning the entire valuation from 2019 roughly equals the company’s annual profits today. What appeared expensive then looks absurdly cheap in retrospect.

The Missing Ingredient in Value Calculations

Buffett himself provided the key to resolving this paradox in the same 1992 letter: “Growth is always a component in the calculation of value.”

This statement transforms everything. True value investing doesn’t dismiss growth—it integrates it. A stock trading at a high multiple becomes defensible if the business is growing rapidly enough. Conversely, a stock trading at a low multiple can be genuinely expensive if the business is deteriorating.

The critical shift: Replace “How cheap is this stock?” with “How cheap will this stock be relative to its future earnings?”

Earnings per share (EPS) tell this story better than any historical metric. Nvidia’s EPS didn’t just keep pace with the rising stock price—they accelerated beyond it. The company’s transformation from a well-established chip maker into an indispensable player in the AI revolution created earnings growth that fundamentally reset what the business was worth.

Why Predicting the Future Is Harder Than Measuring the Past

Here’s the honest truth: spotting tomorrow’s Nvidia is extraordinarily difficult. Looking at balance sheets and valuation multiples is straightforward. Predicting where technology is heading, how markets will evolve, and how individual companies will compete is something else entirely.

Even disciplined investors get this wrong. The challenge isn’t just gathering data—it’s synthesizing that data into an accurate worldview about the future. Will an industry’s demand materialize as expected? Will competitive dynamics change? Will margins expand or compress under pressure?

When the stakes are this high, mistakes are inevitable. The ability to identify emerging trends and position capital accordingly separates the best investors from the rest. But it also means accepting that conviction and deep analysis can’t guarantee success.

The Framework for Finding Today’s Undiscovered Winners

To identify potential tomorrow’s Nvidia candidates among stocks to buy, investors need a dual lens:

The backward-looking component remains important. Examine profitability, cash flow, balance sheet strength, and historical performance trends. These reveal whether a company has built sustainable competitive advantages.

The forward-looking component is where most investors falter. Ask: What major shifts are coming in this industry? Is this company uniquely positioned to benefit? How will its competitive moat strengthen or weaken? What earnings could this business generate in five or ten years?

The best stocks for the next decade might trade at seemingly expensive multiples today. They might make current value investors uncomfortable. But they’ll be recognized as tremendous bargains when hindsight arrives—assuming they execute on their potential.

The takeaway isn’t to abandon valuation discipline. It’s to recognize that valuation without foresight is backward-looking portfolio management. True value emerges when you correctly anticipate the future and position accordingly.