A great question was asked at the Berkshire Hathaway shareholder meeting many years ago.
Questions from Berkshire shareholders:
“Good morning Mr. Buffett and Mr. Munger. My name is Steve Yates. I’m from Chicago. I’m a Berkshire shareholder and this will be my sixth year at this conference. Thank you so much for your time and advice over the years, it’s been great, and for selling Berkshire this year and allowing us to acquire more of the best companies in the world at a very low price. I would like to thank all the wonderful people.”
Buffett replied, “I will say thank you to them.”
Shareholders continued: Every quarter, we receive reports of increased earnings, increased sales, increased cash flow, expanded equity base, gained market share, and declining stock prices. The company’s five-year annual growth rate is 60%, and sales are four times his. He has two related questions. First, is this a growth stock or a value stock? What are the definitions of these terms? Secondly, the company sells his recreational vehicles, and the demographic trends for recreation and leisure areas, RVs, cruise ships, golf equipment, etc. seem to be very good. Any chance for Berkshire here? Thanks. “
Warren Buffett: Forget Value and Growth Investing
Buffett answers this question as follows:
“Well, the question of growth and value is something we’ve covered in past annual reports. These aren’t two different categories of businesses. Knowing how much cash you will be able to spit out by date will give you an accurate figure for today’s value. There is potential and most growth companies, companies that are characterized as growth companies, have that as their hallmark, yet in our minds there is no distinction between growth and value. The potential for growth, and any business that we see as having the potential to grow with good economics, is part of the valuation equation, but they are all value.”
“These are all worthwhile decisions where companies that don’t pay dividends and are growing 100% a year are losing money. When do you think the introduction to investing was written? Remember I said that a bird you have is worth two of the birds in the bush. There was not.
“Now Aesop was working on something, but he didn’t finish it because there are some other questions that go along with it, but it’s an investment equation. Five today than one hundred tomorrow.” 10. He forgot to say exactly when you were going to put the two into the bush, but if he’s given those two factors, the next 2600 years of investment You trade birds in your hand, which is an investment, you place cash today, and then the problem is to evaluate how many birds are in the bush as an investment decision. You might think that there are two birds in the bush, or three birds in the bush, and you decide when they appear and when they get If the interest rate is 5% and you can get 2 birds in 5 years, now you have 1. 2 birds in the bush are better than the birds in your hand right now. I would like to trade the birds in my hand because they are so much better, but I say take 2 birds in the bush, compounding at about 14% a year, and the interest is only 5%.”
“But if the interest rate was 20%, five years from now I would refuse to turn two birds into two birds. I would say that it is not enough to do it.I’m going to have more than two birds in five years. Well usually growth people are associated with more birds in the bush but you still have to decide when to get them and you have to measure that against interest rates Yes, you have to measure against other bushes and other you know the other equations and it’s all an investment. It’s value is based on knowing how much it’s worth, how many birds will be in that bush when you’re trying to get them, and what the interest rate is. Now, when you pay $500 billion to buy a stock, you always think in terms of buying an entire company because you can think of it as a businessman and not as a stock speculator. ”
“Take a company that has great prospects and is paying nothing right now. You buy it at a valuation of 500 billion. If you can, so if you don’t pay anything this year and start paying next year, you have to be able to pay $550 billion every year forever, but it doesn’t get paid until the third year In that case, you would have to pay $65 billion forever to justify the current price every year waiting for you to take the birds outside.
Bushes mean more birds have to be taken out. It’s that simple.And I wonder in my heart
I really think about the mathematics implied in what they’re trying to achieve, like buying 10 shares of stock at a certain price to make the business an implied $100 billion profit. ”
“Let’s say if a business is only one year behind in making payments and wants to get a 10% return, it will pay you $500 billion. I mean 55 billion cash they have to be able to spit out they have to probably make $80 billion or closer to pre-tax if you look around this world of business and pre-tax If you look at how many companies are making $80 billion, 70, 60, 50, 40, 30, you might find nothing.
It takes a rather insane shift in profitability to get enough birds from that particular bush to be worth giving up what you have. ”
“The second part of your question about whether you’re willing to buy a great business with quadruple returns.
Charlie is also interested in it, but let’s ask Charlie.
Charlie Munger replies, “I’d like to know what it is.”
“He wanted to ask that bastard who has all the net worth in his stock and tell us what it is,” Buffett said.
“Would you like to know the company name?” a shareholder asks.
“We want the name of the company.
[The audience laughs]
“It’s called National RV, it’s based in California, and it sells recreational vehicles,” a shareholder responds.
“Okay, well, there are a lot of people with birds in their hands. Let’s see what they do in terms of national RVs. Charlie, is there anything else about growth and values and all that? Buffett jokingly warns the audience.
Charlie Munger on Value Investing
Speaking to the audience, Charlie said:
“Well, I agree that all intelligent investments are value investments. You can use filters to sift through the investment universe, and stick to stocks that aren’t great just because they’re in a safe deposit box for 40 years, but are cheap. If you have to move around all the time, they get closer to what you think is of real value, which means you have to sell them and then find someone else. Kind of an investment and I’m sitting on my butt because I found some great companies and correctly predicted the future.”