As an investor who studies in great detail the strategies and investment philosophies of the great value investors, I have always been intrigued by the debate of value vs. growth. I just wrote this post on qualitative vs. quantitative analysis. The discussion between growth and value is similar: the best growth investors are good business analysts… they have to be. It’s easy to find a company that’s growing, but the hard part is determining if that company will continue to grow at a rate that justifies its current valuations. There is much greater reliance on the analyst’s level of skill in evaluating business prospects. A deep value investor, on the other hand, can analyze a balance sheet and determine that the value of a given stock is less than what a private owner would be willing to pay. To paraphrase Warren Buffett: “The numbers should be obvious-they should hit you over the head with a baseball bat”.
So often the two schools get divided: growth or value. However, Buffett talks about how that is really a fallacy. In one of his Berkshire shareholder letters he talks about how the two schools of thought are joined at the hip. Growth is an input that is a necessary part of determining value, according to Buffett.
I believe this is true, but I also think that Buffett has evolved his thinking over the years-partly due to his business experience and analytical skills compounding over time, and partly due to his rapidly expanding capital base (it became harder for him to invest in smaller, deep value investments that were so profitable for him early in his career).
One difference between the two schools is the holding period. Buffett is famous for saying his favorite holding period is “forever”. In a recent shareholder letter, he talks about how his Coke investment will soon be paying him annual dividends that will equal the total amount of his initial investment! That’s the beauty of compounding, and holding a great company for years. That type of strategy is also lower maintenance. Buy a group of great stocks, hold them forever, continue to compound dividends and earnings over time…. of course, that’s easier said than done.
Walter Schloss, another favorite investor of mine, doesn’t share the same opinion when it comes to holding period. He discusses how he operates his investment portfolio like a “grocery store manager”. He buys merchandise with the intention of selling it at a profit at a later time. And that strategy worked incredibly well for him. He in fact felt that his strategy was much easier to implement than Buffett’s- it takes much less analytical proficiency and projections. It’s just simple math, and managing emotions (being able to buy when there is trouble, and sell when there is euphoria).
Take a look at the long term chart of Coke:
Hmmm… it was a 10 bagger (went up 1000%) in the 1990’s when Buffett bought it. It clearly was undervalued in the 1980’s and 1990’s, but look at the period from 2000 forward. Not anything to get excited about. Guess what? Coke got extremely expensive in the late 90’s selling for upwards of 40 times earnings with growth that would likely only be a quarter of that valuation over time. Graham said (paraphrasing), “Almost all securities have a price that would be so cheap that they should be bought, and also have a price that would be so dear that they should be sold”. Like Schloss practiced for 47 years-he bought cheap stocks and sold them when they got fairly valued-over and over and over again. Boring was fun (and profitable) for him. Buffett never sold his Coke shares, even though the valuations clearly were too expensive and the outlook for future returns from that specific investment was mediocre in 2000.
The good news for Buffett… he continues to collect passive income from his Coke investment, and those dividends will continue to grow over time (something the chart above doesn’t include). Good companies continue to reward patient shareholders. “Time is the friend of the wonderful business”.
So What’s Better to Focus on-Growth or Value?
I come to the same conclusion I came to in my previous post on quantiative vs qualitative methods of analysis… there is no right/wrong way. It depends on many factors, including personality and skill sets.
My own opinion: I personally think both schools of thought should be one in the same: it’s all value investing. There are just different ways to interpret the value. Coke obvious had tremendous value in the early 1990’s when Buffett bought it. Schloss and other true deep value Grahamites find consistent value and make consistent profits.
Buffett, and others like him, are home run hitters. They are looking for big winners that they can hold over long periods of time. Schloss and Graham were focused on stringing together base hit after base hit, and through the magic of compounding one decision on top of another, they achieved magnificent results.
It’s a dynamic debate that continues to evolve in my own mind, and as I mentioned in my previous post, I am more in the deep value camp currently, as I find that the strategy is much easier to implement with greater margin of safety given my current set of skills. Over time, I intend to improve my skill as a business analyst, and I’ll always be keeping an eye out for that one great investment that you can buy and hold forever.
In the meantime, I’ll keep methodically making patient investment decisions, knowing that value works over time. Hit for average, look for a bunch of 50 to 100% winners, and save the 10 baggers for the Buffett’s, Lynch’s and other pros that have the edge there. There are always more opportunities coming for 10 baggers… for now, I can build strong results while focusing on capital preservation as my top priority. With Graham and Schloss as my guides, my feeling is that this will continue to lead to superior investment results over time. Base hit after base hit…