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?