That was precisely the question asked during the 2019 annual general meeting (AGM) for Berkshire Hathaway, a conglomerate controlled by well-known investors Warren Buffett and Charlie Munger.
The Amaz(ing) debate
Earlier this month, Berkshire Hathaway revealed that it bought a stake in online retailing giant Amazon.com. Amazon is far from the traditional “value” stock, with a heady price-to-earnings (P/E) ratio of 78. The debatable purchase prompted a question from a shareholder during Berkshire Hathaway’s AGM. The shareholder asked:
“With the full understanding that Warren had no input on the Amazon purchase, and that, relative to Berkshire, it’s likely a small stake, the investment still caught me off guard.
I’m wondering if I should begin to think differently about Berkshire looking out, say, 20 years. Might we be seeing a shift in investment philosophy away from value-investing principles that the current management has practiced for 70 years?”
“It’s interesting that the term ‘value interesting’ came up. Because I can assure you that both managers who — and one of them bought some Amazon stock in the last quarter, which will get reported in another week or ten days — he is a value investor.”
“The idea that value is somehow connected to book value or low price/earnings ratios or anything — as Charlie has said, all investing is value interesting. I mean, you’re putting out some money now to get more later on. And you’re making a calculation as to the probabilities of getting that money and when you’ll get it and what interest rates will be in between.
And all the same calculation goes into it, whether you’re buying some bank at 70 percent of book value, or you’re buying Amazon at some very high multiple of reported earnings.”
I agree that “value” in value investing is a redundant term since we seek value in all share investments.
Value in Amazon
Amazon is often touted as a growth stock with its high P/E multiple and amazing growth rates, but growth shares such as Amazon can also have “value.”
Buffett gave an excellent summary on the debate of growth vs. value investing in his 1992 shareholder letter. He said many investors see any mixing of “value” and “growth” as a “form of intellectual cross-dressing.” However, the two approaches are “joined at the hip,” and growth will always be a component in the calculation of value. He also reiterated (emphases mine):
“In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value –– in the hope that it can soon be sold for a still-higher price — should be labeled speculation (which is neither illegal, immoral nor — in our view — financially fattening).
… Unfortunately, such characteristics [having low P/E or price-to-book ratios], even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics — a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield — are in no way inconsistent with a “value” purchase.”
Back to Amazon and its value. Just because the online retailer has a high P/E ratio doesn’t mean its stock can’t be a valuable purchase.
Amazon’s value can come from taking a bigger market share for both its online retail and cloud businesses. According to its 2018 annual report, Amazon is a small player in the global retail market, and its business represents a low single-digit percentage of the market. The global cloud market is also huge relative to the size of its cloud offering, AWS. Based on these factors alone, there could be value in buying Amazon shares.
When Buffett first announced the purchase of Amazon by his company, he even commented that he has been “an idiot” for not investing in Amazon earlier. And no, his company has not changed its investing style one bit.
Worried about the overall state of the market? Do you know the 1 thing you should never do in the stock market? The Motley Fool Singapore’s new e-book lays out a plan to handle market crashes, details the greatest advantage you have as an investor, and looks at decades worth of market data to bring you the smartest insights on investing. You can download the full e-book FREE of charge—Simply click here now to claim your copy
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore recommends shares of Berkshire Hathaway and Amazon. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.