Value investing is often generalized as an approach whereby investors look for “bargain” stock prices, sifting through low price-to-earnings companies to find buy ideas; however, true value investors understand that a low price is no substitute for a quality business. This month’s article illuminates this message, using an example of buying “good” versus “cheap” stocks during the 2008 financial crisis to demonstrate how valuation, while “terribly important,” should not itself drive the investment process. The author quotes Warren Buffett’s gem, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” His message is especially true when we expand our investment time horizon; in the long term, valuation matters less than a company’s core operations, the true source of sustainable investor return.
In the attention to details series, we lift the lid on what WDS does behind the scenes to invest well by sharing what we are reading. These are pieces that often articulate different aspects of our philosophy and ultimately our process. Check back regularly for a new article that is worth the read.