03-06-2016, 07:06 PM
A Buffett Approach To Buying Growth Stocks
MAY 23, 2013
http://www.forbes.com/sites/investor/201...5b01355853
Growth or value? It’s one of the most basic questions in the investment world. Pundits debate the attractiveness of growth versus value stocks, and mutual funds neatly chop up the market into “growth” and “value” funds.
There’s just one problem. The distinction between growth and value is flawed.
Just ask Warren Buffett. He doesn’t seem to differentiate much between growth and value. “Market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication,” he explained in his 2000 annual letter to Berkshire Hathaway BRK.A +%shareholders.
To Buffett all investing is about value. Assessing a company’s growth prospects is simply one part of gauging value. Rapid growth in sales and profits can add a ton of value to companies whose shares may at first glance look pricey. Some of Buffett’s big recent buys bear out that notion.
When Berkshire acquired Burlington Northern Santa Fe back in 2010, the railroad had a not-so-lean price/earnings ratio of about 20, but it had increased earnings at an average annual rate of 19% for seven years. LubrizolLZ +% had a five-year earnings growth rate of about 40% when Berkshire bought it back in 2011. Lubrizol had increased earnings in six of the seven years before being acquired.
Buffett doesn’t look at just one growth-related metric when assessing a company’s value. As he noted in that 2000 letter to shareholders, a high growth rate can sometimes “destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.”
Buffett isn’t explicit in the metrics he uses to gauge a company’s growth prospects, but his former daughter-in-law and colleague, Mary Buffett, offered an idea in her book The New Buffettology. Buffett wants a firm’s earnings to have increased reasonably consistently over the prior decade, and he looks at a number of other earnings-driven variables. These include return on equity, return on retained earnings, free cash flow and debt—which should be no more than five times annual earnings. Buffett is concerned with the quality of a company’s earnings and its sustainability over the long haul.
_____________________________________________________________________________
MAY 23, 2013
http://www.forbes.com/sites/investor/201...5b01355853
Growth or value? It’s one of the most basic questions in the investment world. Pundits debate the attractiveness of growth versus value stocks, and mutual funds neatly chop up the market into “growth” and “value” funds.
There’s just one problem. The distinction between growth and value is flawed.
Just ask Warren Buffett. He doesn’t seem to differentiate much between growth and value. “Market commentators and investment managers who glibly refer to ‘growth’ and ‘value’ styles as contrasting approaches to investment are displaying their ignorance, not their sophistication,” he explained in his 2000 annual letter to Berkshire Hathaway BRK.A +%shareholders.
To Buffett all investing is about value. Assessing a company’s growth prospects is simply one part of gauging value. Rapid growth in sales and profits can add a ton of value to companies whose shares may at first glance look pricey. Some of Buffett’s big recent buys bear out that notion.
When Berkshire acquired Burlington Northern Santa Fe back in 2010, the railroad had a not-so-lean price/earnings ratio of about 20, but it had increased earnings at an average annual rate of 19% for seven years. LubrizolLZ +% had a five-year earnings growth rate of about 40% when Berkshire bought it back in 2011. Lubrizol had increased earnings in six of the seven years before being acquired.
Buffett doesn’t look at just one growth-related metric when assessing a company’s value. As he noted in that 2000 letter to shareholders, a high growth rate can sometimes “destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years.”
Buffett isn’t explicit in the metrics he uses to gauge a company’s growth prospects, but his former daughter-in-law and colleague, Mary Buffett, offered an idea in her book The New Buffettology. Buffett wants a firm’s earnings to have increased reasonably consistently over the prior decade, and he looks at a number of other earnings-driven variables. These include return on equity, return on retained earnings, free cash flow and debt—which should be no more than five times annual earnings. Buffett is concerned with the quality of a company’s earnings and its sustainability over the long haul.
_____________________________________________________________________________