- Warren Buffett, chairman and CEO of Berkshire Hathaway.
Paying too much for a share can result in disappointing returns.
No company, no matter how good, is a buy at any price.
Share valuation is not an exact science.
Your valuation will never be exactly right.
By setting yourself some limits, you can reduce the risks that come from overpaying for shares.
Paying for a quality business can still pay off in the long run.
There is some evidence to suggest that paying what might seem to be a moderately expensive price (slightly more than the suggested maximum) for a quality business can still pay off in the long run.
The caveat here is that you have to be prepared to own shares for a very long time. Perhaps, forever.
The way people invest is changing.
Many people are not building a portfolio of shares during their working lives to cash in when they retire.
An increasing number will have a portfolio that may remain invested for the rest of their lives.
- For them a portfolio of high-quality shares of durable companies may help provide them with a comfortable standard of living, with the initial price paid for the shares not being too big a consideration.
Are investors under-valuing the long term value of high quality businesses?
Remember, the shares of high quality businesses are scarce.
This scarcity has a value and might mean that investors undervalue the long term value of them.
The ability of high-quality companies to earn high returns on capital for a long time can create fabulous wealth for their shareholders.
This is essentially how investors have built their fortune (such as Warren Buffett).
Challenge your thinking by answering these questions
1. Can you list some examples of high-quality companies with high and stable returns on capital that have created substantial wealth over the last decade?
2. Look at them carefully. Do you agree that few, if any, of these shares could have been bought for really cheap prices?
3. In many of these cases, do you concur that the enduring quality and continued growth of the companies could be seen to have been more important than the initial price paid for them?