Warren Buffett

Warren Buffett

The class A shares of Warren Buffett’s Berkshire Hathaway hit record highs today by crossing the $200,000 mark, yet again expanding Mr Buffett’s empire. Warren Buffett has been one of the most influential and successful investors the world has ever witnessed. He has consistently been able to beat the market and as a result is regarded as an investment guru by the majority of investment professionals.

Warren Buffett was mentored by the “father of value investing”, Ben Graham, who taught at Columbia Business School and introduced his investment philosophies to Buffet. In fact, Mr Buffett himself is often regarded as a value investor.

Surprisingly, the terms “value investing” and “quality investing” are often used interchangeably. But are they really the same thing? While some may argue that they indeed are the same, I am of the belief that quality investors “may” be value investors; but the reverse is most certainly not true.

Value investors’ investment horizon may be short. They merely have the view that the intrinsic value of a stock is higher than its current market price and that the company’s shares are under-priced. They expect that the market will eventually realize this misvaluation, which in turn would lead to the increase in the company’s share prices. However, this does not necessarily imply that the company possesses a stable balance sheet, or that the management of the firm is highly credible. An idea in behavioral finance is that investors often overreact, and just as they are slow in recognizing share price growth potentials, they overreact and underestimate the value of a firm upon announcement of an adverse event. Hence, while the firm’s fundamentals may not indicate a healthy and stable organisation, a value investor may still believe that a long position in the company’s stocks may indeed generate handsome returns. Therefore, I am of the belief that while quality investing “may” lie under the same category as value investing, the reverse is not true.

So is Warren Buffett a quality investor or a value investor?

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” (Warren Buffett, 1989)

You be the judge!