Is Warren Buffett Really a Value Investor?


If you have read much about Warren Buffett, you know that he is held up as a Ben Graham disciple and is considered one of the most famous value investors in the world. Buffett admits that he has moved away from value investing, while still keeping some of its principles (most notably margin of safety) as part of his investing framework. Still, people primarily associate Buffett with value investing.

While reading this year's annual report, I noticed something interesting. "Goodwill and other intangibles" represents 13.3 billion of Berskhire's 34 billion in assets. Buffett comments on this by saying:

Clearly we own some terrific businesses. We purchased many of them, however, at large premiums to net worth – a point reflected in the goodwill item shown on the balance sheet – and that fact reduces the earnings on our average carrying value to 10.8%.

So Buffett buys businesses at large premiums to net worth? Doesn't sound like value investing to me.

Value investors use many different approaches. Some value a company based on what they could get for the assets in a fire sale, and look to buy the stock at a price below that. On the other end of the spectrum, some will attempt to calculate what a strategic acquirer might be willing to pay, and try to buy below that. The numbers you get from the first calculation and the second calculation can be dramatically different, but if you seek to buy below your calculated number, you can (loosely) be considered a value investor.

Those of you intimately familiar with accounting know that accounting for intangibles is a controversial area. Certainly Buffett could still be a value investor if he is picking up mega-brands at a premium to net assets that are really a good deal. As an example – if you could buy the Coca-Cola trademark for $10 million, that would be a steal, even though you would carry it on your books as an intangible. But many value investors totally ignore intangible assets when they calculate intrinsic value. (I think that's a mistake – but it's a whole post in and of itself)

I don't really have an answer, but I would be interested to know what those of you think who have followed Buffett over the years. Is he really a value investor? If so, how do you explain the premiums he paid for so many of Berkshire's companies? If not, why has the label continued to stick even though he has moved on?

  • Buffett has explained his transformation in the past. The simple explanation is that he dealt with much smaller amounts of capital in the early years. This forced him to begin purchasing more private enterprises than public companies. And private enterprises almost always carry a premium (as long as they are making money).

    In addition, Buffett has attributed his investing acumen to two people. Ben Graham is the most recognized, but Philip Fisher was just as much as responsible for Buffett’s head.

    On top of everything else, Buffett is a valuation genius. There’s a story of him riding down a road with a friend in a city. Buffet started rattling off numbers of each company that he passed – some public, but most private. What we think is a premium may be a discount in his thinking. And the reverse can be true as well.

  • I see where you are going, but fundamentally I believe he is a value investor. The new breed of this discipline, ultimately led by Buffet, are beginning to understand the need to evaluate human relationships and intangibles in the overall valuation of a business. There is a visible shift in the value investing world towards understanding, and integrating, qualitative factors into the investment decision.

  • I wonder if this couldn’t easily turn into a game of “pin the title on the investment strategy.” I’ve always thought that Buffett was sui generis–one of a kind. He’s less an investor like I am with my portfolio than he is a manager like I am with my own business. All the homey homage to Ben Graham is nice, but Buffett has made his money in a way that is different from most of the other investors I’ve studied. Anybody offer up an example of someone similar?

  • Rob,

    I think Warren addressed this question in a couple places in his letter. While he likes the Graham-esque style of value investing, the number of opportunities to do it in companies big enough to warrant his attention aren’t plentiful. The other thing that seems to be a focus for him now is on stellar management. All things being equal, the stellar managers deliver stellar results.


  • I believe the devil is in the details here. He says that he is paying a premium to net worth, but not to net present value. I believe that he is merely stating that they are purchasing companies for more than that are worth more on the books today. They can very well still be considered a value in the long-term.

  • Rob

    Interesting points, and all very good. I was just pointing out that he no longer fits the mold “value investor” (by what I perceive to be the orthodox view of value investing) but people still seem him that way. I think you are all on the right track, that Buffett is just a value investor in a different sense of the word. He’s still finding things that are undervalued, but not undervalued by the old standard of book value.

  • Rob,

    I agree with your last statement. I tried to say something similar in my clumsy way. At this point in his life Warren doesn’t want to comb through 1000 small opportunities in classic value investing style. If he can only do 5 deals a year, they all have to be big ones, and a different level of valuation thinking is needed for those.


  • Jason

    To be fair, I think EVERYONE is a value investor. No one wants to pay more for something then its worth.

    But there are a couple of factors in play. First of all, as people have noted, Berkshire is big, so it will be hard to find large, deep value companies. Secondly, Warren Buffet has moved very far away from the traditional Ben Graham approach of Net-Net stocks, or cigarette butts. If he were running a fund, his approach would probably be described as a concentrated growth-at-a-reasonable-price (GARP) strategy.

    This closely parallels his evolution as a businessman – one of the things Buffet has been very, very good at it is figuring out which companies can generate a wide economic moat. That is no small task – and certainly not something that jumps off a balance sheet. Perhaps one reason why he shifted from being a pure Graham investor to a GARP type investor is an increasing confidence in his ability to value the intangibles.