Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 6. Buffett Investing = Value + Growth

Most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth."... In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.^[73]

—Warren Buffett

Most people characterize Buffett as a value investor. The common usage of the term value investor connotes someone who invests in stocks that have such characteristics as low price-to-earnings (P/E) or market-to-book (M/B) ratios. It also refers to those people who buy stocks after the market prices have fallen substantially. Presumably, such investors have a sufficient understanding of the underlying businesses and expect the prices to recover. As Buffett's words clearly state, a smart investor should consider both value and growth investing simultaneously. Contrary to popular belief, Buffett is not a pure value investor. In this chapter, I illustrate the way Buffett combines value and growth investing strategies to earn high returns.

Berkshire Hathaway Is a Growth Stock

For each of the past four decades, Berkshire has outperformed the S&P 500 index. Table 6.1 presents the annualized rates of growth in Berkshire's book value per share, Berkshire's stock returns, and corresponding returns on the S&P 500 index. For the entire 40-year period ending in 2008, Berkshire's annualized growth in per-share book value is 20.7 percent and its annualized stock return is 21.8 percent. If you had ...