Friday, September 4, 2015

Buffett on Value vs Growth

Warren Buffett, in an interview on CNBC back in March of this year, said the following:

"I always say if you aren't investing for value, what are you investing for? And the idea that value and growth are two different things makes no sense. I mean, growth is part of the value equation and a company that grows and uses little capital in doing obviously worth more money than one that doesn't grow. That doesn't make the one that doesn't grow valueless though." - Warren Buffett on CNBC

Growth can be a good thing if the price is right (i.e. price paid comfortably less than est. per share intrinsic value). Unfortunately, exciting growth prospects sometimes attracts more than its fair share of attention leading to market prices more than reflecting intrinsic value.

Too little margin of safety if future business performance disappoints.

In fact, growth isn't necessarily even always a good thing:

"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." - Warren Buffett in the 1992 Berkshire Hathaway (BRKa) Shareholder Letter

Some seem to treat all growth as good growth. Well, that's just not the case.

" growth, per se, tells us little about value. It's true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth." - Warren Buffett in the 1992 Berkshire Letter

What matters is buying a good business -- whether it happens to have growth prospects or not -- at a discount and warranted confidence that the core business economics are attractive and will remain so.

Some businesses produce high returns on existing capital but can't do the same on incremental capital. These can still prove to be sound investments (again, at the right price) but growth prospects -- at least the kind of growth that produces satisfactory or better returns -- will usually be modest. The fact is putting incremental capital to work in such a business can actually end up hurting investors. So excess capital needs to be intelligently allocated elsewhere* (outside the business) or, otherwise, returned to shareholders.

One problem that sometimes arises with higher growth businesses is simply that investors pay too much for the privilege of ownership. In other words, due to the excitement about the upside potential, what could go wrong doesn't get fair consideration. The end result being investors pay a price that doesn't protect them sufficiently if things don't go quite as well as hoped.

A price biased toward things going well can increase the risk of permanent capital loss. In fact, an optimistic price might lead to insufficient rewards even if things do go well.

More risk.

Less reward.


Long position in BRKb established at much lower than recent prices

Related posts:
High Returns on Capital vs High Returns on Incremental Capital - Jan 2015
Altria: Timing Isn't Everything, Part II - Jul 2014
Aesop's Investment Axiom Revisited - Jul 2014
Altria: Timing Isn't Everything - Jul 2014
Asset Growth and Stock Returns, Part II - Mar 2014
Asset Growth and Stock Returns - Feb 2014
Buffett and Munger on See's Candies, Part II - Jun 2013
Buffett and Munger on See's Candies - Jun 2013
Aesop's Investment Axiom - Feb 2013
Grantham: Investing in a Low-Growth World - Feb 2013
Buffett: Stocks, Bonds, and Coupons - Jan 2013
Maximizing Per-Share Value - Oct 2012
Death of Equities Greatly Exaggerated - Aug 2012
Stock Returns & GDP Growth - Jul 2012
Why Growth May Matter Less Than Investors Think - Jul 2012
Ben Graham: Better Than Average Expected Growth - Mar 2012
Buffett: Why Growth Is Not Necessarily A Good Thing - Oct 2011
Technology Stocks - May 2011
Grantham: High Growth Doesn't Equal High Returns - Nov 2010
Growth & Investor Returns - Jun 2010
Buffett on "The Prototype Of A Dream Business" - Sep 2009
High Growth Doesn't Equal High Investor Returns - Jul 2009
The Growth Myth Revisited - Jul 2009
The Growth Myth - Jun 2009

* Berkshire has the luxury of being able to move excess capital from where it can't produce high returns to where it can.
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