value
Price is what you pay
The rule
Price is what you pay; value is what you get. A great company at a silly price is still a bad buy.
Where it flips
But the reverse trap is treating a low price as value by itself, and buying a poor business just because it looks cheap. Price discipline works only alongside a real read of quality, not in place of it.
Quality and price are two separate questions. Admiring the business does not settle the second. A wonderful company bought far above its value can still lose money for the buyer. The reader keeps the two apart. Is it good? And is the price sane?
A worked example
A reader loves a retailer's brand and buys at eighty times earnings. The business keeps doing well, yet the price already paid for a decade of perfection. Good company, poor purchase, because the price ran ahead of the value. [illustrative]
How to spot it
- ·a purchase backed by the company's quality alone
- ·the multiple paid never checked against the value received
- ·'it is a great business' used to end the price question
Warren Buffett · Berkshire Hathaway shareholder letters