Two major schools of investing: Quality Investing and Value Investing.

 Quality versus Net asset value bargains

Quality: Price today $12. Price in 5 years? Net asset value bargains: price today is $12 and its intrinsic value should be $18. Is it always better to buy compounders? Is it always better to buy growth? If you are buying an asset because it is cheap, is your upside limited? Is buying cheap assets the name of the game? Must you always focus on cheap assets? You should look for both: good and cheap. The greater the margin of safety the higher the potential return. Always demand a huge margin of safety.

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This is an excellent set of statements that gets to the very heart of the debate between two major schools of investing: Quality Investing and Value Investing.

Let's break down, analyze, and expand on each point, culminating in a critical opinion.

Analysis & Expansion of the Statements

1. "Quality versus Net asset value bargains"

• Quality (The Compounder): The statement "Price today $12. Price in 5 years?" is the essence of investing in quality compounders. The focus is not on a static intrinsic value, but on the company's ability to grow its intrinsic value over time. You are betting on the company's durable competitive advantages (moat), excellent management, high returns on capital, and its ability to reinvest earnings at high rates of return. The future price is a function of this growth. If earnings per share double, the share price is likely to follow.

• Net Asset Value (NAV) Bargains (The Cigar Butt): This is classic Ben Graham-style deep value investing. The company may be mediocre, but it's selling for significantly less than its liquidation value or a conservative estimate of its current assets. The premise is that the market is irrationally pessimistic, and eventually, the price will converge to its intrinsic value. The upside is the gap between $12 and $18. This strategy often involves assets that are "one puff" stocks—you buy them cheap, they revert to mean, and you sell.

2. "Is it always better to buy compounders? Is it always better to buy growth?"

• The Allure: It seems obvious. Who wouldn't want to own a business that becomes more valuable every year? In theory, yes, it's better.

• The Critical Reality:

  • The Price Problem: The biggest risk with compounders and growth stocks is overpaying. A wonderful company bought at a ridiculous price becomes a bad investment. If you overpay for growth, you can experience years of poor returns even as the company executes perfectly (see many tech stocks in the early 2000s).

  • The Prediction Problem: Identifying a true long-term compounder in advance is incredibly difficult. Industries change, moats erode, and today's superstar can be tomorrow's dinosaur. The "growth" you see might be cyclical, not secular.

  • The Impatience Problem: The market can be irrational in the short term. Even a genuine compounder can stagnate for years before its value is recognized, testing an investor's conviction.

3. "If you are buying an asset because it is cheap, is your upside limited? Is buying cheap assets the name of the game? Must you always focus on cheap assets?"

• The "Cigar Butt" Limitation: Yes, the upside in a pure net asset value bargain is theoretically capped. Once the price reaches intrinsic value ($18 in the example), the reason for holding the stock disappears. You've captured the margin of safety. This is what Charlie Munger called the "cigar butt" approach—one or two puffs of profit, and then you have to find another.

• Is it the "Name of the Game"? For pure deep-value investors, yes. Their entire philosophy is built on buying dollars for fifty cents, repeatedly.

• The "Value Trap" Danger: The critical risk of only focusing on cheap assets is the value trap. A stock is cheap for a reason—its business may be in permanent decline. Its assets may be eroding, or its earnings may be disappearing. The "cheap" price can get even cheaper if the intrinsic value falls faster than the price. You have a margin of safety on the balance sheet, but no safety from a deteriorating business.

4. The Synthesis: "You should look for both: good and cheap. The greater the margin of safety the higher the potential return. Always demand a huge margin of safety."

This is the evolved, modern view of value investing, heavily championed by Warren Buffett after his influence from Charlie Munger.

• "Good and Cheap" (The "It's-Fat-Pitch" Investing): This is the holy grail. It means finding a high-quality business with a durable competitive advantage, trading at a price that provides a margin of safety. You are not just buying a cheap asset; you are buying a growing stream of future cash flows at a discounted price.

• Margin of Safety Redefined: For a compounder, the margin of safety isn't just the gap between price and current assets. It's the gap between the price you pay and your conservative estimate of the company's future intrinsic value. A "huge margin of safety" protects you from:

  1. Errors in your analysis (you were wrong about the quality).

  2. Unexpected bad luck (industry disruption, recession).

  3. The inherent unpredictability of the future.

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Critical Opinion

The progression of these statements mirrors the evolution of smart capital from rigid dogma to a more pragmatic, synthesized philosophy.

1. The Duality is False, but the Tension is Real: Pitting "Quality" against "NAV Bargains" as a strict either/or is a false dichotomy. The most successful long-term investors seek to unite them. They want to buy a wonderful business at a fair or bargain price. The real tension is in the trade-offs: How much quality are you willing to sacrifice for a deeper discount? How much of a premium are you willing to pay for superior quality?

2. "Always" is a Dangerous Word in Investing: The statements "Is it always better..." and "Must you always focus..." are traps. The market is a dynamic ecosystem. There are periods when growth stocks are wildly overvalued and deep value is the only rational choice. There are other periods when the economy is so disruptive that the few true compounders are the only assets that can thrive. A rigid strategy that ignores market context is fragile.

3. The Superior Framework: The final synthesis—"look for both good and cheap"—is the most robust framework. It acknowledges that what you buy (the business quality) is ultimately more important than what you pay for it, but it crucially adds that what you pay determines your return. Paying too much for quality can lead to mediocre returns, while buying a poor business because it's cheap can lead to permanent capital loss.

4. Margin of Safety is the Bedrock: The concluding emphasis on a "huge margin of safety" is the non-negotiable element that ties it all together. It is the principle that manages risk and acknowledges the limits of human foresight. Whether you're valuing a stagnant net-asset bargain or a high-flying compounder, demanding a significant discount to your calculated intrinsic value is the single most important discipline an investor can have.

Conclusion:

The initial statements chart a path from a simplistic, binary view of investing to a sophisticated, nuanced one. The optimal strategy is not to choose between Quality and Value, but to seek the intersection of both, guided always by the discipline of a Margin of Safety. This approach avoids the value traps of cheapness-alone and the capital destruction of overpaying for growth. It is the difference between being a mere "trader of cigar butts" and being a "business owner" for the long term.

Buying a high growth company at an unreasonable price. Look for these diamonds in the stock market. A debate.

"It is always better to buy high growth where the intrinsic value is growing, at an unreasonable price. Look for these diamonds in the stock market."

This is a fascinating and potent statement that gets to the very heart of active investing. Let's break it down, expand on its principles, and then debate its merits and pitfalls.

Discussion: Deconstructing the Statement

The statement, "Always better to buy high growth where the intrinsic value is growing, at an unreasonable price," contains three critical components:

1. High Growth & Growing Intrinsic Value: This is the core of what you're buying. You're not just buying a ticker symbol; you're buying a share in a business that is fundamentally becoming more valuable over time. Intrinsic value is the present value of all future cash flows the company is expected to generate. A "high growth" company is one where these future cash flows are projected to increase at a rapid rate. The key here is the sustainability and quality of that growth. Is it driven by a durable competitive advantage (a "moat"), a revolutionary product, or a massive market trend?

2. "At an Unreasonable Price": This is the controversial twist. Conventional wisdom (especially from value investors like Benjamin Graham) is to never overpay. This statement argues that for the right company, even a price that looks expensive by standard metrics (like P/E ratio) can be justified. The "unreasonableness" is in the eyes of the beholder—it looks unreasonable today based on current earnings, but may look cheap in hindsight several years from now when the company's earnings have exploded.

3. "Diamonds in the Stock Markets": This is the outcome. These are the companies that defy conventional valuation, compound wealth at extraordinary rates for decades, and become the Amazons, Teslas, or Mercados of the world. They are "diamonds" because they are rare, incredibly valuable, and often hidden in plain sight or misunderstood by the market.

Expansion: The Philosophy in Practice (The "How-To")

This approach is the bedrock of Growth Investing, championed by legends like Philip Fisher, and later, T. Rowe Price and William J. O'Neil. It's also closely related to the concept of Compounding Machines that Charlie Munger and Warren Buffett (in his later years) often discuss.

How does an investor operationalize this?

• Look Beyond the Trailing Multiples: Don't screen out stocks just because they have a high P/E ratio of 80. Instead, ask: What will its earnings be in 5 years? If earnings are expected to grow 40% per year, that P/E of 80 can quickly become a very reasonable P/E of 15 on future earnings.

• Focus on the TAM (Total Addressable Market): Is the company operating in a niche market or a massive, expanding ocean? A company with a $10 billion TAM has a natural growth cap; one with a $1 trillion TAM has runway for decades.

• Assess the Moat: What prevents competitors from eroding those high growth rates? Is it network effects (Facebook), brand power (Apple), proprietary technology (Adobe), or relentless innovation (Tesla)?

• Management Quality: Are the founders and leaders visionaries who are capital allocators and long-term builders? Philip Fisher's "scuttlebutt" method—researching a company through employees, competitors, and customers—is key here.

• Reinvestment Potential: Is the company able to reinvest its profits back into the business at similarly high rates of return? This is the engine of compounding.

Debate: The Perils and Counterarguments

This strategy is seductive but fraught with danger. For every diamond, there are countless pieces of glass that look similar.

The Bull Case (Why the Statement Can Be True):

1. The Power of Compounding: A business growing at 25% per year will see its earnings double in less than 3 years. Paying a "high price" today can be trivial if you are certain (or highly confident) about this growth trajectory.

2. Opportunity Cost: The biggest risk in investing is often not losing money, but missing out on gigantic gains. Being too conservative and avoiding "unreasonably priced" growth stocks can mean missing entire technological revolutions.

3. Market Myopia: The market often undervalues the long-term potential of disruptive companies because it's fixated on next quarter's earnings. This creates the "unreasonable price" opportunity for those with a longer time horizon.

The Bear Case (The Dangers and Flaws):

1. The Valuation Trap: The graveyard of stock markets is filled with "can't-miss" growth companies that were bought at absurd prices during hype cycles (see the Dot-com bubble). When growth inevitably slows or fails to meet sky-high expectations, the valuation multiple contracts violently, leading to catastrophic losses (the "double whammy").

2. The Difficulty of Prediction: It is incredibly hard to predict growth rates years into the future. Competition, technological disruption, regulatory changes, and simple execution errors can derail even the most promising companies. Betting on a long-shot growth story is often just speculation disguised as investing.

3. Confirmation Bias: Investors who fall in love with a story tend to seek out information that confirms their belief and ignore red flags. The phrase "intrinsic value is growing" can become an article of faith rather than a dispassionate analysis.

4. The "Always" Problem: The word "always" is almost always wrong in investing. A rigid strategy that ignores margin of safety entirely is reckless. There are times when the price is so detached from any plausible future reality that no amount of growth can justify it.

5. The Value Investor's Rebuttal: A traditional value investor would argue that paying an "unreasonable price" eliminates your Margin of Safety—the central tenet of value investing. This margin is what protects you when your assumptions are wrong. By abandoning it, you are taking on uncompensated risk.

Conclusion: A Nuanced Verdict

The statement is a powerful half-truth.

It is true that the single best way to generate life-changing wealth in the stock market is to identify and hold exceptional, high-growth companies for the long term. In this pursuit, being too focused on short-term valuation metrics can cause you to miss these rare "diamonds."

However, it is dangerously false to suggest that the price you pay doesn't matter "always." Paying an egregious price, even for a great company, can lead to a decade of poor returns.

The synthesis lies in a more balanced approach:

• Seek extraordinary businesses first. Focus on identifying those with durable moats, massive TAMs, and superb management—the ones where the intrinsic value is genuinely and predictably growing.

• Then, be a smart shopper. Even when you find a diamond, you shouldn't pay a king's ransom for it if you can help it. Try to buy it at a "reasonable price for a great company" rather than an "unreasonable price."

• Differentiate between "Expensive" and "Overvalued." An expensive stock (high P/E) can be a good buy if its growth prospects are underestimated. An overvalued stock is one where even the most optimistic growth scenarios cannot justify the current price.

In the end, the quest for these diamonds is the holy grail of investing. But the most successful investors are those who can combine the growth investor's vision for the future with the value investor's discipline about the price.

Charlie Munger's wisdom on crisis was profound.

The big money is not in the buying and selling, but in the waiting

Charlie Munger:   Own things you understand. Maintain adequate liquidity and let compounding do the heavy lifting.

Charlie Munger's wisdom on crisis was profound. "The big money is not in the buying and selling, but in the waiting" What he meant is patience is the investor's greatest asset. You wait for the right pitch. You wait for a crisis when prices are attractive, then you swing hard. Charlie also believed that most of what passes for sophisticated investing is actually just sophisticated gambling. He had no patience for complexity, for trading, for trying to be clever. He believed in buying wonderful businesses at fair prices and holding them forever. During crisis, Charlie would remind Buffett to think about what the business will look like in 10 years, not what the stock price will do tomorrow. He'd say, "If you are not willing to own it for 10 years, don't own it for 10 minutes."

Focus on business fundamentals rather than market gyrations

That perspective kept them focused on business fundamentals rather than market gyrations. Charlie Munger also understood the value of inversion. Instead of asking how do I succeed, he'd ask how do I fail? Then, he systematically avoid those failure modes. For crisis the failure modes are obvious. Using leverage, panicking and selling at the bottom, speculating rather than investing, trying to time things perfectly. Avoid those mistakes and you will do just fine.

Never interrupt your compounding unnecessarily

One more thing Charlie taught Buffett. The first rule of compounding is to never interrupt it unnecessarily. Every time you sell during a panic, every time you switch strategies, every time you try to get clever, you interrupt your compounding. The people who get wealthy are the ones who set up a sensible strategy and then stick to it through multiple market cycles.



After you build your first million ....

If you build your first million, congratulations, you have done something many have never achieved. You have developed the discipline, the temperament, and the knowledge that separates successful investors from everyone else. Now your opportunity is to accelerate your journey to your second million by capitalizing on crisis. And, crisis will come. They always do. The question is whether you'll be prepared to take advantage or whether you'll panic like everyone else.

Take advantage of crisis

The 3 strategies shared by Buffett:

• Buying wonderful companies at crisis prices
• Upgrading your portfolio during dislocations
• Building cash before the storm to deploy during the panic.

These are not complicated, but they require discipline, patience, and courage. They require discipline to build cash during the good times when it feels like you're missing out. They require patience to wait for the right opportunities rather than chasing everything that moves, and they require courage to act when everyone else is paralyzed by fear.

If you can do these things, if you can stay rational while others panic, if you can see crises as opportunities rather than disasters, you can build your second million much faster than you built your first.


Crises accelerate the transfer of money from the impatient to the patient by the stock market

Remember, the stock market is a device for transferring money from the impatient to the patient. Crises accelerate this transfer. The impatient panic and sell at the bottom. The patients stay calm and buy at the bottom. Over time, this difference compounds into enormous wealth. The next crisis is your opportunity. Prepare now, by building cash.

Volatility is not risk. Risk is the permanent loss of capital.

Volatility is not risk. Risk is the permanent loss of capital. 

When market drops 20%, that is volatility, not risk. The risk only materializes if you sell at the bottom and lock in the loss.

If you hold good companies through the volatility, you'll be fine. In fact, volatility creates opportunity for those with emotional control to buy at lower prices. Never worry about volatility.

The real risk in investing is not in volatility. 

• It is buying a bad business at any price. 
• It is overpaying even for a good business. 
• It is using borrowed money that you might need to repay at the worst possible time. 
• It is letting fear or greed make your decisions for you.

Focus on what you can control. 

What you can't control

• You can't control whether the market goes up or down tomorrow. 
• You can't control whether we enter a recession next year. 
• You can't control what other investors do, but you can control several critical things. 

What you can control

• You can control which companies you invest in.  Choose businesses you understand.  With strong competitive advantages, run by honest and capable management, selling at reasonable prices. 
• You can control how much you pay. Never overpay, even for a great business. 
• You can control your time horizon. Give your investments time to compound. 
• You can control your emotions. This is the hardest and most important thing you can control. When you focus on what you can control, you worry less about what you can't. 

The market will do what it does. Your job is to make smart decisions and stick with them.

Keep a journal of your investment decisions. 

Write down why you are buying a stock, what price you are paying, what you expect the business to do over the next 5 to 10 years. Then periodically review your journal. 

This practice does several things. 

• First, it forces you to think clearly about your decisions before making them. You can't write I am buying because everyone says it is going up. You have to articulate a real investment thesis. 
• When you look back at your decisions, you'll see patterns. Maybe you always buy when you are feeling euphoric and the market is high. Maybe you always sell when you are scared and the market is low. Recognizing these patterns is the first step to changing them. 
• Third, it helps you learn from both successes and failures. When an investment works out, you can look back and see what you got right. When it doesn't, you can see what you missed. Over time, you'll become a better investor by learning from your own experience.

How to find good growth stocks?

Finding good growth stocks is a blend of art and science. It involves identifying companies that are not just growing, but growing at an accelerating pace and are positioned to do so for the foreseeable future.

Here is a comprehensive guide, broken down into a philosophical framework, a practical checklist, and the tools to get started.

The Core Mindset: What is a "Growth Stock"?

First, understand what you're looking for. A growth stock is a share in a company whose earnings or revenue are expected to grow at a significantly faster rate than the market average. These companies often reinvest their profits back into the business (so they may not pay dividends) and are typically in expanding industries.

Key Principle: You are betting on the future potential of the company, not just its current value.

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The Step-by-Step Process to Find and Evaluate Growth Stocks

Think of this as a funnel: you start with a broad universe of ideas and then apply increasingly strict filters to find your best candidates.

Step 1: Idea Generation - Where to Look

You need a starting point. Here are the best places to find promising companies:

1. Your Own Experiences: What products and services are you and your friends obsessed with? Are you using a new software at work that's a game-changer? Is there a brand your children must have? (This is how many people found Apple, Netflix, and Amazon early on).

2. Industry Trends and Megatrends: Identify powerful, long-term shifts in the economy and society.

   • Artificial Intelligence (AI) & Automation

   • Cloud Computing

   • Digital Payments & FinTech

   • Electric Vehicles (EVs) & Clean Energy

   • Genomics and Biotechnology

   • Cybersecurity

3. Screening Tools: Use stock screeners to mechanically find companies meeting specific growth criteria. (See "Essential Tools" section below).

4. Expert Analysis & News: Read reputable financial news (Bloomberg, Reuters, The Wall Street Journal) and follow insightful investors and analysts. Don't take their word as gospel, but use them for ideas.

Step 2: The Quantitative Checklist - The Numbers

Once you have a candidate, dig into the financials. These are the non-negotiable metrics for a growth company.

Step 3: The Qualitative Checklist - The Story

The numbers tell you what is happening; the qualitative analysis tells you why and if it can continue.

1. Durable Competitive Advantage (The "Moat"): What prevents competitors from stealing their customers?

   • Network Effect: The service becomes more valuable as more people use it (e.g., Visa, Facebook, Uber).

   • Brand Power: A trusted, must-have brand that allows for premium pricing (e.g., Apple, Nike).

   • Cost Advantage: Can produce goods or services cheaper than anyone else (e.g., Amazon in retail, Costco).

   • Intellectual Property: Patents, trademarks, and regulatory licenses that block competition (e.g., pharmaceutical companies, sophisticated software).

2. Total Addressable Market (TAM): Is the company operating in a large and growing market? A company with a great product in a small niche will eventually run out of room to grow.

3. Strong Management: Look for a founder-led or visionary leadership team with a clear long-term vision and a track record of execution. Read shareholder letters and listen to earnings calls.

4. Scalable Business Model: Can the company grow revenue much faster than its costs? Software is the classic example—it costs very little to duplicate and sell a software program for the millionth time.

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Essential Tools for Your Research

• Stock Screeners: Finviz, Yahoo Finance, TradingView. Use them to filter for stocks with, for example, "Sales Growth YoY > 25%"

• Financial Data: Yahoo Finance (user-friendly), Bloomberg Terminal (professional), Morningstar (in-depth analysis).

• Company Communications: Listen to quarterly earnings calls (found on investor relations pages). Read the annual report (10-K) and quarterly report (10-Q) filed with the SEC.

Common Pitfalls to Avoid

• Chasing Past Performance: A stock that went up 500% last year isn't necessarily a good buy today. Focus on the future growth potential.

• Ignoring Valuation: Even the best company can be a bad investment if you pay too much for it. A high P/E ratio requires even higher growth to justify it.

• Confusing a Good Product with a Good Business: A product can be revolutionary, but if the company can't monetize it effectively, it's not a good stock.

• Lack of Patience: Growth investing requires a long-term horizon (5+ years). Volatility is normal. If you believe in your research, hold through the ups and downs.

A Practical Example: How You Might Have Spotted NVIDIA Early in the AI Boom (Circa 2016-2018)

1. Idea Generation: You read about the rise of AI, machine learning, and data centers. You identify that all these fields require immense processing power.

2. Qualitative Check: You research and find that NVIDIA's GPUs are uniquely suited for this task, not just for gaming. They have a huge moat (dominant market share, complex IP) and a massive TAM (AI, cloud, autonomous vehicles). Management is focused on this shift.

3. Quantitative Check: You look at the numbers. Revenue from the Data Center segment is exploding (e.g., growing 50%+ YoY). Gross margins are high and stable. Earnings are following suit. The PEG ratio, while not cheap, is justified by the incredible growth rate.

4. Decision: You conclude that NVIDIA is not just a chip company but a foundational pick for the AI megatrend and decide to invest.

Final Word

Finding good growth stocks is a skill that takes time and practice. It requires diligent research, a healthy skepticism, and the emotional fortitude to think long-term.

Start by paper trading: Build a mock portfolio and track your picks for 6 months. See how your research holds up before committing real capital.

Disclaimer: This information is for educational purposes only and does not constitute financial advice. All investing involves risk, including the possible loss of principal.