Price matters in the stock market.
Just like you wouldn't run out and pay $10 a gallon for gasoline, why would you pay 100 times earnings for a company that is growing 15% a year?
Do you think the people who paid $212 for Yahoo YHOO in January 2000 are ever going to get their money back?
Yahoo's a good company, but it may take a very long time for the stock to get back to its old highs.
The same could be said of many other technology stocks and also even those technology companies with moats around them that got clobbered in post 2000.
Remember - the single greatest determinant of a company's return in your portfolio is the price you pay for its shares.
As important as it is to understand the quality of a company - its growth prospects, competitive position, and so forth - it is even more vital that you pay a fair price for the firm's shares.
You'll make a lot more money buying decent firms with low valuations than by paying premium prices for premium companies. Why? Because the future is uncertain, and low valuations leave a lot more room for error.
Just like you wouldn't run out and pay $10 a gallon for gasoline, why would you pay 100 times earnings for a company that is growing 15% a year?
Do you think the people who paid $212 for Yahoo YHOO in January 2000 are ever going to get their money back?
Yahoo's a good company, but it may take a very long time for the stock to get back to its old highs.
The same could be said of many other technology stocks and also even those technology companies with moats around them that got clobbered in post 2000.
Remember - the single greatest determinant of a company's return in your portfolio is the price you pay for its shares.
As important as it is to understand the quality of a company - its growth prospects, competitive position, and so forth - it is even more vital that you pay a fair price for the firm's shares.
You'll make a lot more money buying decent firms with low valuations than by paying premium prices for premium companies. Why? Because the future is uncertain, and low valuations leave a lot more room for error.
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