Growth vs. Value Investing, Buffett's view

It’s an argument between growth vs. value investing. We’ll uncover Buffett’s view on growth vs. value investing in this post.

Table of Contents

Value investing fundamental

Buffett is known for his advocacy of the value investing paradigm — buying shares of companies that are underpriced relative to their value according to some kind of analysis of company fundamentals, meaning its dividend yield, price-to-earnings multiple, price-to-book ratio, and so on.

Buffett’s personal formulation of the strategy is simply “finding an outstanding company at a sensible price” as opposed to finding mediocre companies for cheap prices.

Buffett’s evolution

But his embrace of “value investing” does not mean Buffett is skeptical of growth — it just means he avoids investing in companies solely because he thinks they have the potential to grow much larger than they are.

For a long time, however, Buffett notes in his 1992 shareholders letter, investors interested in “value” and investors interested in “growth” have been considered to be at odds.

Growth investing fundamental

Growth investors, the thinking goes, primarily look for companies that show they can grow at an above average rate. Companies that growth investors like might look expensive today, but are worth it if they are going to grow at or above the expected rate.

People’s misunderstanding

Value investors, on the other hand, purportedly ignore potential growth as a function in their fundamental analysis.

Buffett rejects this contrast, proudly proclaiming that “growth and value investing are joined at the hip.”

Growth is a component of value

“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth,’” he wrote in his 1992 letter.

“We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago)… Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive,” he adds.

Growth value needs to be justified

Value investing, for Buffett, means “seeking value at least sufficient to justify the amount paid.” Valuing a company higher because you expect it to exhibit healthy long-term growth is not the same as investing in a company solely because you believe it will grow and then justifying your valuation — a practice which Buffett is not fond of.

Munger’s view

Charlie Munger has made it clear: “All intelligent investing is value investing, acquiring more than you are paying for. You must value the business in order to value the stock.” His words are very similar to Buffett’s views.

This quote illustrates value investing. Investing in stocks is all about judging the gap between “price” and “value” and acting accordingly. Munger believes that each share of stock represents a part of the company’s basic business, so to understand the value of the stock, it is necessary to evaluate the value of the basic business.

Closing words

Keep in mind what Buffett wrote: “Growth is always a component in the calculation of value.”

Value investing and growth investing share the same philosophy: value is the discounted value of the investment’s future present cash flows, while growth is only a prediction process used to determine value.

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