value
A good company is not always a good stock
The rule
A wonderful business bought at too high a price is a poor investment. Judge quality and price together.
Where it flips
But chasing only cheapness lands you in value traps, bad businesses that stay bad. The fix is to want both: a good business and a sensible price, refusing to pay any price for quality.
Everyone can see a great company. That is exactly why its price is often bid up to a level that assumes years of perfection. Your result depends on the gap between what you pay and what you get. So a fair business at a cheap price can beat a superb business at a dear one. Never let love for the business blind you to the price.
A worked example
Two firms grow alike. The famous one trades at 60 times earnings, the dull one at 10 times. Ten years later both did fine. But the buyer of the famous one paid for a future that merely arrived, and made little. The cheap buyer made plenty. [illustrative]
How to spot it
- ·"it is a great company" with no mention of price
- ·a sky-high multiple excused by the story
- ·quality admired, price ignored
Benjamin Graham · The Intelligent Investor