2001: What's the difference between a growth and value stock?

AUDIENCE MEMBER: Good morning. Mo Spence from Waterloo, Nebraska.

You’ve often stated that value and growth are opposite sides of the same coin.

Would you care to elaborate on that? And do you prefer a growth company that is selling cheap or a value company with moderate or better growth prospects?

WARREN BUFFETT: Well, actually I think you’re — you may be misquoting me. But I really said that growth and value, they’re indistinguishable. They’re part of the same equation. Or really, growth is part of the value equation.

So, our position is that there is no such thing as growth stocks or value stocks, the way Wall Street generally portrays them as being contrasting asset classes.

Growth, usually, is a chance to — growth, usually, is a positive for value, but only when it means that by adding capital now, you add more cash availability later on, at a rate that’s considerably higher than the current rate of interest.

So, there is no — we don’t — we calculate into any business we buy what we expect to have happen, in terms of the cash that’s going to come out of it, or the cash that’s going to go into it.

As I mentioned at FlightSafety, we’re going to buy $200 million worth of simulators this year. Our depreciation will probably be in the area of $70 million or thereabouts. So we’re putting $130 million above depreciation into that business.

Now that can be good or bad. I mean, it’s growth. There’s no question about it. We’ll have a lot more simulators at the end of the year. But whether that’s good or bad depends on what we earn on that incremental $130 million over time.

So if you tell me that you own a business that’s going to grow to the sky, and isn’t that wonderful, I don’t know whether it’s wonderful or not until I know what the economics are of that growth. How much you have to put in today, and how much you will reap from putting that in today, later on.

And the classic case, again, is the airline business. The airline business has been a growth business ever since, well, you know, Orville [Wright] took off. But the growth has been the worst thing that happened to it.

It’s been great for the American public. But growth has been a curse in the airline business because more and more capital has been put into the business at inadequate returns.

Now, growth is wonderful at See’s Candy, because it requires relatively little incremental investment to sell more pounds of candy.

So, its — growth, and I’ve discussed this in some of the annual reports — growth is part of the equation, but anybody that tells you, “You ought to have your money in growth stocks or value stocks,” really does not understand investing. Other than that, they’re terrific people. (Laughter)

Charlie?

CHARLIE MUNGER: Well, I think it’s fair to say that Berkshire, with a very limited headquarters staff — and that staff pretty old — (laughter) — we are especially partial to laying out large sums of money under circumstances where we won’t have to be smart again.

In other words, if we buy good businesses run by good people at reasonable prices, there’s a good chance that you people will prosper us for many decades without more intelligence at headquarters. And you can say, in a sense, that’s growth stock investing.

WARREN BUFFETT: Yeah, if you had asked Wall Street to classify Berkshire since 1965, year-by-year, is this a growth business or a value business — a growth stock or value stock — you know, who knows what they would have said.

But, you know, the real point is that we’re trying to put out capital now to get more capital — or money — we’re trying to put out cash now to get more cash back later on. And if you do that, the business grows, obviously. And you can call that value or you can call it growth. But they’re not two different categories.

And I just cringe when I hear people talk about, “Now it’s time to move from growth stocks to value stocks,” or something like that, because it just doesn’t make any sense.