Look up the definition of value investing in the dictionary, and you’ll see a picture of Warren Buffett.

He’s easily the greatest of all time, or GOAT.

But you might be surprised how he built the bulk of his wealth. (Spoiler alert: it wasn’t buying value stocks.)

Over the weekend, Warren Buffett announced he would be stepping down as CEO of Berkshire Hathaway.

While he will surely continue to be active, this brings to an end one of the most legendary tenures in investing history.

In honor of Buffett’s retirement, I wanted to share a note that I wrote a few years ago about how he is misunderstood.

My (perhaps controversial) view is that while value investing is where he started, Buffett is actually the greatest growth investor of all time.

Allow me to explain…

Value Investing in a Nutshell

Below is a standard definition of value investing, courtesy of Investopedia.

But what does it really mean to be a value investor?

Read the writings of the founding fathers of value investing, and you will read about them buying companies at less than book value (the accounting value of their assets).

There will also be many examples of otherwise buying a company below the replacement value of its assets or liquidation value.

These “buy $1 of assets for $0.50” opportunities used to exist in the stock market 50 years ago.

That was before these strategies became well known, the explosion in the asset management business, and (most importantly) the internet.

Outside of the very complex distressed security market, there are very few of these opportunities in the stock market anymore — certainly not large ones.

Buffett began his professional investing career back in the 1950s and 1960s when these opportunities still existed.

Looking at how he actually made his money, though, you see that it was not on these types of opportunities.

Instead, it was buying large companies that would then go on to grow their earnings tremendously.

Buffett’s Best Bet

Let’s look at his most famous investment, The Coca-Cola Co. (KO).

He initiated this position back in 1988, and his $1.3 billion investment has turned into a $24.5 billion stake — or a profit of $23 billion.

Here is a Financial Analysis table of the key financial metrics for KO since 1988 and through the end of 2023.

Here is another table with some summary percentage totals.

Let’s discuss both tables.

We don’t have precise data, but Buffett began buying KO back in 1988. For the purposes of our analysis, we ran our numbers as if he took four years to enter the position.

Across those four years, the median price-to-earnings (P/E) ratio of the stock was 15.8x. Over the next three decades, the median P/E ratio was a little less than 27x.

This means that the appreciation from a multiple perspective was +70%.

Also note that at 16x forward EPS back in 1988, KO was a +10% premium to the multiple of the S&P 500. Even 1989 was only a -15% discount and 1990 was a premium again.

Now let’s look at the earnings-per-share (EPS) over the period. It has grown +2,370% from $0.18 per share to almost $2.50 per share in 2023.

Looking at the almost +2,200% increase in the stock price across this 35-year period, the expansion in earnings multiple (+70%) certainly helped. But the real driver was growth in earnings.

This was also a stock that was not trading at a discount to asset value or the overall stock market at the time.

The valuation of KO stock was not what drove the appreciation in Buffett’s stake… it was the growth in the earnings.

The Key to His Success

Now, let’s go back to the definition of “value investing” at the top. It does take into account this situation.

It specifically says value investors seek “stocks that they think the stock market is underestimating.”

This captures what happened with KO stock.

It wasn’t that it was trading at a discount to the asset value at the time or the stock market, but it certainly was excellent value given the future growth that would happen.

In that sense, it certainly was a good “value” purchase.

This means, though, that the important analysis of the stock was not about understanding the value — but rather about handicapping the growth.

It is interesting to point out that the return I quoted above was the return of his stock holding, but not his total returns.

If we consider the dividends that were paid, that is another +952% return, bringing his return to over +3,000%.

The annual dividend has grown from $0.08 per share to $1.84 per share, or +2,200%. That number is almost the same as the earnings growth.

Again, the key to this investment is the growth of the company.

While Buffett is lauded as the greatest value investor of all time, I think the KEY to his success has been identifying growth.

This brings me to my favorite Buffett quote…

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This is something that every investor should take to heart.