Value vs Growth

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We often hear top analysts say that growth and value are mutually exclusive. If you’re looking for growth in an investment then one needs to pay a higher premium to acquire that asset, which makes it unattractive to investors seeking value. It could be true to a certain degree, but we think that the best investments are value investments that have potential for growth. The perfect example of this synergy between value and growth is Berkshire Hathaway (company founded & run by Warren Buffet and Charlie Munger). They always look for value deals which have potential for growth, over a longer period of time. They never buy a business that is either a pure growth play or solely a value play with no growth.

This acquisition or investment strategy, where growth & value complement each other and are not mutually exclusive, delivers best results over time. This strategy works best for long-term investments and not short-term trades. If you’ve noticed Berkshire does fewer deals than their peers, because to find a deal with this growth & value mix is hard and far apart. It needs a great deal of patience, discipline, foresight, execution and above all conviction in your strategy. It’s very difficult to stay true to your conviction during economic up-cycles and down-cycles, but if time is on your side, you’re more likely to win big than not. That doesn’t mean you invest in anything and it’ll work out well for you over time.

Here’s an interesting fact: the first ever investment primer or equation was said/written in 600 BC by Aesop (a Greek fabulist & story teller). He famously said, “a bird in hand is worth two in a bush”. It was very insightful at that time, but if only Aesop would’ve elaborated on (1) when were you going to get the 2 birds in the bush, was it tomorrow, a week, a year later and (2) what were the returns that you had to measure this against. If he had addressed these 2 things, this equation simply put, would have defined the essence of investing for the next 2623 years!! 😊

Aesop’s Investment Equation reimagined. 

Let’s take a deeper dive into this equation.

  • A bird in hand is an asset or cash are you investing to acquire an asset today – Cash being deployed today.
  • While you’re evaluating the asset being acquired or cash deployed (bird in hand), you also have to determine how many birds are there in the bush….2 birds or 3, 4, and  how long will they take to come out? – Growth projections over time.
  • You also need to determine or forecast what returns would you be expecting over time, for waiting for the 2 or more birds to come out – Current interest or yield rate.
  • How much time do you have to wait to take out a bird from the bush? Longer the wait, more birds need to be taken out of the bush – Time taken for the asset to grow & achieve forecasted cash flow.
Conclusion:

To sum it all up……smart investing is acquiring an asset with inherent growth potential over time, at a reasonable present value/price, taking into account the interest rate you would pay or receive today for not parting with the cash, plus the time taken to achieve that desired/forecasted growth. This simple investing approach takes lot of patience and discipline to see beyond the froth & news. You may not be able to do many deals regularly, but the ones that you do have much better chances of success, growth, and continued returns. This simplistic yet powerful investment equation has worked for over 2600 years, and we think it’s here to stay for the foreseeable future.

Please consult your financial advisor or tax professional before making any investment decisions. Collective thinking benefits all. What are your thoughts & insights on this topic? Please share them here or email us
References:  Berkshire Hathaway Annual Shareholder Meeting, year 2000

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