And the Winner Is … Value Investing?
By Sham Gad February 28, 2008


The rivalry between value investing and growth investing is as intense as a Mets-Yankees duel. At any given time, one will outperform the other.

For example, during the Internet era, you got hung out to dry if you were a value investor. People were saying that even Warren Buffett had lost his touch, as his holding company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), languished while the likes of Oracle (Nasdaq: ORCL) and Yahoo! (Nasdaq: YHOO) racked up double-digit percentage gains weekly -- sometimes daily.

But when the dot-com bubble burst, the trophy returned to the value-investing approach, as good old-fashioned companies like McDonalds (NYSE: MCD) began to sizzle once again.

Care to wager which school of thought is winning today? I don't.

Value plus growth equals investing
Regular readers already know that I have a value-oriented investing approach. However, I apply just one rule to my investing decisions: I'll invest only in businesses that I can understand, and that are selling at an attractive price.

I consider this approach "value investing" only in the sense that any investing decision should be based on the act of seeking out value. After all, if our goal is to realize capital gain, the way to maximize that gain is to buy companies trading below their intrinsic value.

If it helps, avoid categorizing your investments based on one characteristic. The idea that "value" investments are only those that trade at low price-to-earnings multiples is too narrow of an outlook, and it's just as silly as assuming that you can acquire growth only at very high multiples. Consider that legendary value investor Bill Miller concluded a little more than a year ago that Amazon.com (Nasdaq: AMZN) -- trading at a grossly excessive price-to-earnings ratio -- was deeply undervalued. The stock more than doubled in 2007.

Make no mistake: If I were investing over the long term, and I had to choose a portfolio solely based on the P/E, I would be inclined to choose one with lower earnings multiples. Your odds of success are probably stronger with 20 securities trading at an average P/E of 12, versus an average P/E of 25. But the point, again, is that investors aren't just limited to just that one metric.

Coming into focus
Rather than use the term "value investing," Charlie Munger prefers to call his and Buffett's approach "focused investing." That's pretty sharp, and it holds up well. Whether you choose to invest alone or go with a professional, your investment process should remain the same: You need to carefully choose every investment by focusing on its own economic merits. A host of metrics -- P/E ratio, amount of debt, return on equity, and so on -- remain important in this approach, but you also have to make sure the business itself is sustainable and capable of continued growth, which leads to value creation.

Consider two of Buffett's recent equity investments, Burlington Northern and Kraft Foods (NYSE: KFT). Depending on whom you ask, they might not fit the traditional mold of value investments. They sport P/Es of 17.4 and 19.4, respectively, but Buffett obviously sees tremendous value over the long term. Kraft currently sports a return on equity of less than 10%, yet it was still attractive enough for Buffett to take a nearly 9% stake. And so, Buffett proves that value comes in many forms and sizes.

Call it what you want
Your investing approach will differ from everyone else's, regardless of whom you strive to emulate. All you can do is learn from the best and fit their teachings inside your own circle of competence. Then, when you a buy a good company at an attractive price, you're sure to end up getting both value and growth. This combination, over the long term, will yield highly satisfactory returns.