Should you buy value or growth stocks? Warren Buffett’s investment advice may be surprising.

Investors often divide stocks into two broad categories: growth stocks and value stocks. Some even define themselves based on which qualities they consider most important. Growth investors typically focus on companies whose sales and profits are expected to grow faster than the market average, while value investors typically focus on companies that are trading at a discount to their intrinsic value. I’ll guess.

Both strategies have advantages and disadvantages. Growth stocks can offer more upside potential, but that benefit comes with more risk and volatility. Conversely, value stocks may have less upside potential, but that drawback is often offset by more stable returns. So which is better to buy, growth stocks or value stocks?

Warren Buffett has considered this topic several times over the years, and his answer may surprise you.

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Warren Buffett considers both value and growth to be important qualities.

Warren Buffett is one of the greatest investors in American history. He has amassed and transformed his personal wealth of over $100 billion. berkshire hathaway We have grown from a small textile business to one of the largest companies in the world. Both accomplishments were made possible by his exceptional ability to pick winning stocks.

Buffett is often referred to as a value investor. In fact, he studied economics at Columbia University under the legendary Benjamin Graham, also known as the “father of value investing.” Buffett himself was of that mindset early in his career, believing that value stocks were better than growth stocks. However, the insights that emerged from his experiences eventually led to a change in opinion.

In a letter to Berkshire shareholders in 1992, Buffett wrote:

In our opinion, the two approaches are fundamentally linked. everytime It constitutes a variable in the calculation of value, whose importance can range from negligible to very large, and whose influence can be positive or negative.

Furthermore, we believe that the term “value investing” itself is redundant. What is “investment” if it is not the act of seeking value that is at least commensurate with the amount paid?

Buffett went on to explain that investors often confuse low valuation multiples with undervalued stocks, but they are not the same thing. Valuation multiples mean nothing out of context. For example, without some idea of ​​future earnings growth, there’s no way to tell whether a stock has a high or low price-to-earnings ratio (P/E).

In fact, stocks that traditionally trade at cheap P/E ratios can actually become expensive if the company doesn’t have growth prospects. Similarly, stocks that traditionally trade at expensive P/E ratios can become cheap if a company has solid growth prospects. Context makes all the difference.

Buffett returned to the value versus growth debate in a 2000 letter to Berkshire shareholders.

Market pundits and investment managers who gleefully refer to “growth” and “value” styles as contrasting investment approaches are revealing their ignorance, not their sophistication. Growth is just one component of the value equation. Usually positive, sometimes negative.

The bottom line is that investors need to consider both value and growth potential when evaluating stocks. Both traits are important. Prioritizing one over the other is like trying to complete a puzzle with only half the pieces.

More investment advice from Warren Buffett

Buffett once said that investing is as simple as “picking a good stock at a good time and sticking with that stock as long as it remains a good company.”In that spot-on statement he includes three different pieces of advice, all of which are equally important.

First, investors should buy good stock. Buffett believes that the most important quality a company can have is a durable economic moat, some kind of advantage that protects the company from competition. Economic moat generally comes down to pricing power or cost advantage.

Second, investors should only buy stocks when: good time. As mentioned earlier, Buffett believes valuations should be considered in the context of growth prospects. Although analyzing these attributes is not an exact science, discounted cash flow models can help investors determine where a stock trades in relation to its intrinsic value.

Third, investors should only buy stocks that they feel comfortable holding for the long term. Markets are not always rational. This means blue-chip stocks can lose value for meaningless reasons. Investors can use a buy-and-hold strategy to eliminate the effects of this volatility.

Combining these three pieces of advice takes practice and patience. But investors who follow Buffett’s blueprint are likely to be rewarded for their efforts.