BUFFETT SHIFTED FROM CLASSIC VALUE METRICS TO CONSIDER GROWTH (FUTURE PROSPECTS) AS PART OF VALUE.
On the investment in Berkshire itself, he says, “Though I knew its business – textile manufacturing – to be unpromising, I was enticed to buy because the prices looked cheap.
Stock purchased of that kind had proved reasonably rewarding in my early years, though by the time Berkshire came along in 1965, I was becoming aware that the strategy was not ideal.”
This lesson is instructive to Buffett’s increasing realization not to limit his view on valuation to “classic value metrics” but to consider growth (future prospects) as part of value.
FOCUS ON QUALITY OR STRUCTURAL ADVANTAGES THAT CREATE INTRINSIC VALUE OVER TIME.
He continues with an instructive focus on quality or structural advantages that create intrinsic value over time, “Unless you are liquidator, that kind of approach to buying businesses is foolish.
First, the original “bargain” price probably will not turn out to be a steal after all.
In a difficult business, no sooner is one problem solved than another surfaces – never is there just one cockroach in the kitchen.
Second, any initial advantage you secure will be quickly eroded by the low return that the business earns.
For example, if you buy a business for $8m that can be sold or liquidated for $10m and promptly take either course, you can realize a high return.
But the investment will disappoint if the business is sold for $10m in ten years and in the interim has annually earned and distributed only a percentage on cost.
Time is the friend of the wonderful business, the enemy of the mediocre.”
IT IS FAR BETTER TO BUY A WONDERFUL COMPANY AT A FAIR PRICE THAN A FAIR COMPANY AT A WONDERFUL PRICE
One last illustration of Buffett’s evolution, “I could give you other personal examples of “bargain purchase” folly but I am sure you get the picture: it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Charlie (Munger) understood this early; I was a slow learner.
But now, when buying companies or common stocks, we look for first-class businesses accompanied by first class managements.”