Warren Buffett has said, value and growth “are joined at the hip.”
See growth is always a component in the calculation of the intrinsic value of a stock. Sometimes growth is enormously important to the calculation of value. Sometimes it’s not important at all. Sometimes growth positively impacts value. Sometimes growth can negatively impact value. But you have to take it into account to some extent when you’re projecting the future cash flows of a
business – whether you’re talking about a “growth” stock or a “value” stock.
That being said, business growth by itself – as in “this is a high growth company” or “this is a low growth company” – doesn’t tell you much about intrinsic value at all.
Being a high growth company can actually negatively impact intrinsic value in some cases. Growth only benefits investors when every dollar used to finance that growth creates more than a dollar in long-term value. Growth can hurt intrinsic value if a high growth business requires additional capital
to support itself, but can’t earn a sufficient return on that capital
The Warren Buffett Way
Combining value investing with growth investing allows investors to choose among top-notch businesses, buy at reasonable prices, and avoid the major volatility of strict growth investing. It may sound Motley, but it’s an excellent way to invest. Don’t take my word for it; take it from Warren Buffett: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
“Growth stocks can be defined as shares in business enterprises that have demonstrated favorable underlying long-term growth in earnings and that, after careful research study, give indications of continued secular growth in the future.”
“A good stock picker is good precisely because he or she loves the process: sifting through thousands of public companies; studying balance sheets; learning the workings, the real details, of industries and businesses; investigating how a company treats its customers and vice versa. This is the only way I know to find great companies, and nothing beats the feeling when it pays off.
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