Were you aware that the legendary Warren Buffett may not be in a position of substantial wealth and influence had it not been for his friend and business partner Charlie Munger? Throughout Warren’s younger professional life as an investor he studied the teachings of the king of value investing and the author of The Intelligent Investor, Benjamin Graham. Graham’s value strategy was formulated nearly 60 years ago as a “defensive” strategy, for the investor who didn’t have the time or the experience to truly study the capital markets. This cautious approach instructs one to confine his holdings to shares of large companies with a long record of profitability and that are in a strong financial condition. We call these the “Blue Chips”, the Exxon Mobil and Proctor Gamble of the world. On the flip side, the “aggressive” investor, the growth strategists, feel they can expand their universe substantially by pursuing smaller hungrier companies that have something to prove to the masses.

In today’s realm of investing, you will see that the value approach tends to be widely favored for their popular mathematical equations that claim to determine whether stocks are “overvalued” hence too risky to own. You will often hear financial professionals preach about “price-to-earnings ratio” or “price-to-book ratio”, these ratios supposedly protect the investor from losing money. If Warren Buffett had stuck only to the value approach, he would’ve missed a very important opportunity.

In 1987, Coca-Cola was refocusing on its core business, changing management and selling it’s other diversified subsidiaries. In 1988, Charlie convinced Warren to start buying Coke’s shares for the Berkshire Hathaway portfolio. They purchased nearly 7% of the company for $1.02 billion by 1989 (Buffett Way 343). Buffett had paid five times book value and over 15 times earnings, this didn’t reflect the Graham-Value approach at all. This turned out to be one of Berkshire’s most lucrative investments. Charlie was the force behind helping Warren cross over the “Rubicon of deep-value investing and begin to consider purchasing high quality companies” ( Buffett Way 178). Coca-Cola did not pass Graham’s strict financial test, yet Buffett went forward and made a significant investment. When moving away from the Graham teachings of Value investing and towards Growth investing, Buffett was quoted saying “I evolved, I didn’t go from ape to human or human to ape in a nice even manner” (Buffett Way 184).

Buffett never gave up his predecessor’s value teachings in terms of understanding the margin of safety, but he slowly realized that “bottom fishing” and searching for only the bargain deals will cause you to overlook the Walmart, Coca-Cola and Apple Computer’s of the world. You must decide early on what type of investor you are. Many people try to be both but end up failing because they lose focus. Growth and value are two completely different attitudes that desire different financial outcomes. If you are fearful of losing capital, only want a “cheap” bargain and don’t think it’s worth taking any risk in the stock market, the value approach is for you. However, if you are interested in owning stock in companies that have not been plundered by the big institutions and have potential to increase their value substantially over time, then perhaps the growth strategy is for you. Either way, identify with one of these strategies, read books, ignore the noise and stick with it rain or shine, and you will be rewarded in the long run.