Recently I attended a seminar by quite an experienced educator from the finance industry who laboured the distinction between ‘value’ and ‘growth’ stocks.
Frankly, I never understood the distinction. I always believed it to be invalid, and this became clear, when I started to ask the hard questions. What clear, comprehensive set of criteria can we use to define a ‘value’ stock? Similarly, what different, clear set of criteria can we use to define a ‘growth’ stock? Are these criteria completely different or discrete? Most importantly, why can’t it be both? In all investing, don’t we want growth stocks bought at value or more cheaply?
When we deeply study the classical investing principles of Benjamin Graham, David Dodd, Warren Buffett, Charlie Munger and other Pure Value Investors, we immediately see this distinction to be most unhelpful. Many ‘experts’ try to say, we can either have a Value stock, which is, broadly speaking, a mature company bought cheaply, and value is just market value. Alternatively, we can have a Growth stock, which is usually a younger company, often one to three years after IPO, that is likely to grow in market value.
Pure Value Investors find this distinction, not only unhelpful, but confusing. We want to buy a strong company that is growing, likely to keep growing, and we want to buy it cheaply, that is, below its Intrinsic Value. Intrinsic Value is not simple market value, or book value. Intrinsic Value is a measure beyond ordinary company ratios, and relates to free cash flows projected into the future, and then discounted back to the present. We follow a specific process to determine Intrinsic Value, best expressed as a range, depending on central interest rates. This is because interest rates act as ‘gravity’ for any investment.
For Pure Value Investors, we always want growth and value companies. The distinction contradicts the foundational principles of our approach. Warren Buffett likened such principles to Aesop’s Bird in the Hand fable; see his video at: https://www.youtube.com/watch?v=vo_TWaV6Xy8 .
If we reflect on this insight, not only does it make sense fundamentally, it makes sense intuitively. The Pure Value Investing method can be applied to any company, young or old. It can also be adapted to any asset class. If you buy a great company cheaply with strong, enduring free cash flows and hold it long term, then there is a very high probability of success, a very high probability one bird can grow into two or more.
By Lee Spano, Creatness International www.creatness.com