Value vs Growth

Summary

The false dichotomy pervasive in modern finance that artificially separates "value investing" (buying low P/E, low price-to-book stocks) from "growth investing" (buying expanding, high-multiple companies). Buffett argues that the terms are joined at the hip, and that "value investing" itself is a redundant phrase.

Evolution & Mentions

• 1992: Buffett provides his definitive dismantling of the concept. He labels the separation of value and growth as "fuzzy thinking" and "intellectual cross-dressing."

  • The Redundancy: "What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid?"
  • The Role of Growth: Growth is simply a variable in the calculation of intrinsic value. If a business earns low returns on capital, growth actually destroys value (meaning growth is a negative component of value).
  • The Ultimate Formula: He points to John Burr Williams' The Theory of Investment Value (written over 50 years prior), which states that the value of any asset is simply the discounted future cash flows (the future "coupons"). The best business is one that can employ large amounts of incremental capital at high rates of return. 1992 Letter

• 2000: At the annual meeting, Buffett and Munger re-emphasize the unified valuation model during the dot-com bubble, stating that no matter how fast a company is growing, it is only worth the cash it can eventually distribute to its owners. 2000 Meeting

Primary Source Quotes

"Most analysts feel they must choose between two approaches customarily thought to be in opposition: 'value' and 'growth.' Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking... the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid?" — Warren Buffett, 1992 Letter

"Growth benefits investors only when the business in point can invest at incremental returns that are enticing—in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor." — Warren Buffett, 1992 Letter

🔗 Connections

• Concepts: Margin of Safety, Economic Franchise vs Business
• Sources: 1992 Letter, 2000 Meeting