Seeking Value in 2026: A Discipline-Based Approach to Stock Selection

The starting point for any disciplined approach is a clear view of the playing field. As we enter 2026, the broad market offers a modest cushion. Stocks are trading 4% below Morningstar's fair value estimate, a gap that suggests some room for error. Yet this aggregate picture masks a stark divergence. The average tech stock, particularly those riding the AI wave, trades at a significant premium. For these names, the market demands even stronger growth to support lofty valuations, leaving little margin for disappointment.

This is the core challenge for the value investor. Superior returns in a stretched market will not come from chasing momentum or paying up for the latest narrative. They will come from identifying companies with durable competitive advantages trading below their intrinsic value. Classic value investing requires a margin of safety-a buffer against error or misfortune. That margin is scarce in high-flying AI and growth stocks, making patience and discipline paramount. The successful approach focuses on understanding a business's economic moat and its ability to compound earnings over decades, not quarterly beats.

The legacy of investors like Warren Buffett, who recently stepped down as CEO of Berkshire Hathaway after a 60-year run, provides a timeless blueprint. His philosophy centered on buying wonderful companies at fair prices, not fair companies at wonderful prices. Consider Amazon, a stock that has underperformed the S&P 500 in recent months. Its appeal lies not in a cheap price tag today, but in the enduring strength of its three core segments-e-commerce, cloud computing, and advertising-each built on a wide moat. Similarly, American Express, Berkshire's second-largest holding, exemplifies a powerful brand acting as a moat. These are businesses designed to compound value over long cycles, a quality that matters more when valuations are high.

The framework for 2026, therefore, is one of selective patience. It means looking past the noise of quarterly earnings and focusing on the durability of a company's competitive position. It means accepting that the best opportunities may not be the flashiest, but the ones with the clearest path to long-term compounding. In a market where the average stock is overvalued, the margin of safety is found not in the price, but in the quality of the business behind it.

Case Study: American Express – A Classic Moat in a Changing World

American Express presents a textbook case for the value investor's focus on durable competitive advantages. The company's strength is built on a powerful brand that acts as a wide economic moat. This isn't just about prestige; it's about creating a high-value customer base that drives repeat transactions and loyalty. As Berkshire Hathaway's second-largest holding, representing 17.4% of its stock portfolio, the investment philosophy of Warren Buffett and Charlie Munger has clearly recognized this quality. Their long-term commitment underscores a belief in the business's ability to compound earnings.

The moat manifests in a unique business model. Unlike Visa or Mastercard, which operate payment networks, American Express issues its own cards and acts as a lender. This structure means it captures value from multiple points: transaction fees, merchant fees, annual cardholder fees, and interest. It also means the company bears the risk of consumer defaults, a trade-off that has historically worked in its favor. The results speak for themselves. Over the past five years, its revenue increase has outpaced Visa and Mastercard, demonstrating the financial power of its integrated model.

A key driver of this strength is its success in attracting younger demographics. As of the third quarter of 2025, around 64% of new accounts were opened by millennials and Gen-Zers. More importantly, these younger customers perform around 25% more transactions per customer than older groups. This is the essence of a durable moat in action: a brand that not only attracts but also deeply engages a new generation, securing a long-term pipeline of high-value activity.

The critical question for the value investor is whether the current price offers a margin of safety given this proven compounding potential. The stock's premium valuation, reflected in its gross margin of 61.04%, prices in a high degree of confidence in this model continuing. The risk is that the moat, while wide, faces persistent competitive pressures and macroeconomic sensitivity. Yet the company's track record of growing earnings and returns on capital, coupled with its status as a Berkshire favorite, provides a tangible buffer. For a disciplined investor, American Express represents a bet on a powerful, self-reinforcing business that is unlikely to be disrupted in the near term. The margin of safety here is less about a cheap price and more about the quality of the business behind it.

Case Study: Amazon – The Valuation Challenge of a Growth Giant

Amazon presents the ultimate test for a value investor. Its three dominant segments-e-commerce, cloud computing, and advertising-create a formidable competitive moat. The scale of its North America e-commerce business alone, generating nearly $106.3 billion in the third quarter, is a testament to its entrenched position. This isn't a fleeting advantage; it's a durable engine for compounding. Yet the market's verdict on this quality is clear: the stock has rallied close to 75% year to date. That surge prices in a flawless growth trajectory, leaving almost no margin of safety for a disciplined investor.

The challenge is estimating intrinsic value for a complex, evolving business. Berkshire Hathaway's recent trim of its Amazon stake offers a telling signal. In the third quarter, the conglomerate reduced its position by roughly 5%. While this could be part of routine portfolio rebalancing, it aligns with a broader pattern of caution. Warren Buffett and Charlie Munger have famously passed on stocks they don't feel confident projecting, and the sheer scale and diversification of Amazon may simply fall outside their current comfort zone for earnings forecasts. The sale, therefore, is less a vote of no confidence in the business and more a recognition that forecasting its future earnings stream at a high valuation is exceptionally difficult.

For the value investor, this creates a tension. The business model is undeniably powerful, with AWS and advertising providing high-margin growth avenues. But the stock's premium valuation demands not just continued success, but superior execution and expansion into new areas like AI. The market is paying for perfection. In this setup, the margin of safety is not found in the price, but in the quality of the moat. The investment thesis hinges on the belief that Amazon's competitive advantages are wide enough and durable enough to justify its cost. For now, the stock's steep climb suggests the market is making that bet. The value investor must decide whether to join the bet or wait for a clearer, less expensive signal of the company's long-term compounding path.

Catalysts and Guardrails for a Value Portfolio

The disciplined investor's path in 2026 will be shaped by a few key catalysts and guarded by clear risk factors. The most immediate potential catalyst is a market correction. With the S&P 500 trading 4% below Morningstar's fair value estimate, a pullback in high-flying stocks could create a broader correction that tests the resilience of overvalued names. This volatility, driven by events like the new Federal Reserve chair in May and ongoing trade negotiations, may introduce turbulence but also present entry points for patient investors with a margin of safety.

The primary guardrail for any value portfolio is the business's ability to compound earnings. This is the ultimate test of a durable moat. If a company's competitive advantages widen and its price remains reasonable, long-term compounding is likely. The risk is that macroeconomic shifts or policy changes could pressure this compounding engine. The Federal Reserve's policy direction, for instance, will influence borrowing costs and consumer spending, directly impacting the earnings power of many businesses. Geopolitical developments could also introduce volatility and test the resilience of global supply chains and consumer demand.

For the value investor, the strategy is to monitor these catalysts and guardrails with a long-term lens. Watch for a pullback in high-flying stocks, which could create opportunities in sectors like communication services and real estate that Morningstar sees as undervalued. At the same time, remain vigilant about the quality of the business behind the price. The margin of safety is not found in a cheap headline number, but in the durability of a company's competitive position and its proven ability to generate returns on capital over time. In a year of expected volatility, that focus on intrinsic value and compounding will be the true guardrail.