Buffett, Burry, and Lynch Disagree on Valuation. All Three Beat the Market Anyway.

Today’s lesson is on understanding the valuation mindset spectrum.

Warren Buffett. Marc Andreessen. Peter Lynch. Michael Burry. David Gardner.

All these investors have incredible track records.

Yet, these investors couldn’t be further apart regarding their views on valuation.

Growth-focused investors like Marc Andreessen, David Gardner, and Cathie Wood wouldn’t think twice about buying a business that looked “insanely overvalued” based on traditional valuation metrics.

Yet, value investors like Warren Buffett, Michael Burry, and Benjamin Graham wouldn’t put any of their capital at risk unless they believed they were buying a business at a meaningful discount to its fair value.

Other great investors like Chuck Akre, Terry Smith, and Peter Lynch are somewhere in the middle of these two extreme mindsets.

They pay attention to valuation but are willing to pay a premium for a business if it’s reasonable (so-called “growth-at-a-reasonable” price investors, or GARP).

While growth, GARP, and value investors approach valuation from a completely different mindset than each other, great investors from each discipline have realized enormous gains.

Growth investors are squarely focused on the upside potential of a business. These investors know they will lose money often, but that’s okay so long as they occasionally buy the next multi-bagger, such as Netflix, Tesla, or Amazon.

Value investors, on the other hand, are squarely focused on valuation. They’ll only buy a business when they believe it is below its intrinsic value.

GARP investors are somewhere in the middle.

That’s why we think it’s most helpful to view each of these valuation mindset approaches on a spectrum that looks like this:

We call this — wait for it — the “valuation mindset spectrum.” (Clever, we know.)

Here is where we believe some super-investors are on this spectrum.

Why are we talking about the valuation spectrum?

Because the first step to understanding valuation is to figure out where you lie on this spectrum.

Are you solely focused on stocks with massive upside potential? You’re a growth investor, meaning you should de-emphasize valuation in your investing process.

Do you love to buy stocks that are down big and hate the idea of “overpaying”? You’re a value investor, so you should emphasize valuation in your investing process.

Are you somewhere in the middle? You’re a GARP investor, and you should learn when to emphasize valuation and when to de-emphasize it.

We bring this up because investors get into trouble when they take advice from investors who approach valuation from a completely different mindset than themselves!

That’s why figuring out where you lie on the valuation mindset spectrum is essential before going further.

If you’re primarily a growth investor, you should listen more closely to how David Gardner thinks about valuation than Benjamin Graham or Warren Buffett. That means you should study total addressable market(TAM) analysis closely and all but ignore how to do a discounted cash flow analysis.

If you’re primarily a deep value investor, you should listen to Michael Burry’s valuation advice closely and ignore Cathie Wood’s thoughts on future upside. It means you should pay closer attention to discounted cash flow models than TAM analysis.

If you’re a GARP investor, you should listen most closely to what Terry Smith, Chuck Akre, and Peter Lynch believe about valuation. That means you should focus on multiples analysis (next week’s lesson!).

So, where are you on the valuation mindset spectrum?

Wishing you investing success,

Brian