- they buy stocks that are of poor quality, and,
- they overpay for these stocks.
Paying the right price is just as important as finding a high-quality and safe company
If you are to be a successful investor in shares, you need to pay particular attention to the price you pay for them.
The biggest risk you face is paying too much.
It is important to remember that no matter how good a company is, its shares are not a buy at any price.
Paying the right price is just as important as finding a high-quality and safe company.
Overpaying for a share makes your investment less safe and exposes you to the risk of losing money.
Be careful, don't be too mean with the price
Be careful not to be too mean with the price you are prepared to pay for a share.
Obviously you want to buy a share as cheaply as possible, but bear in mind that you usually have to pay up for quality.
Waiting to buy quality shares for very cheap prices may mean that you end up missing out on some very good investments.
Some shares can take years to become cheap and many never do.
Can quality be more important than price?
1. Paying too much for a share can result in disappointing returns. No company, no matter how good, is a buy at any price.
2. You need to know how to work out how much to pay for the shares of quality companies. Bear in mind share valuation is not an exact science. Your valuation will never be exactly right, but by setting yourself some limits, you can reduce the risks that come from overpaying for shares.
3. 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.
How is the way people invest changing?
1. 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.
2. 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.
3. Despite trying to put a precise value on a share, we have to remember that the shares of high-quality businesses are scarce. This scarcity has a value and might men that investors undervalue the long-term value of them.
4. 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 such as Warren Buffett have built their fortune.