Warren Buffett (Trades, Portfolio) likes to buy good companies at great prices. This strategy makes a lot of sense, but it is tough to implement because good companies don't tend to trade at great prices nowadays.
Many good businesses do not decline in price substantially overnight just because there's some sort of market panic. Investors want to hold onto good businesses, so they don't suddenly sell their shares because the market has turned lower.
This presents a problem for investors. There are many stories of investors who have missed out on very successful businesses because they've been waiting for years to get the right price.
This right price may never come around, and all the time, the underlying business is becoming more valuable and creating wealth.
Even Buffett himself has warned that this could be a problem. In 1994, at Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders, the Oracle of Omaha noted, "by definition, a great company is one that's going to remain great for 30 years. If it's going to be a great company for three years, you know, it ain't a great company."
This is the dilemma investors have faced for decades summed up in a few words. A genuinely good company will remain a good company for decades, and investors won't want to sell their shares. If the stock price does fall to a deeply discounted level, this might be a sign that the company is no longer a great company. It might be better to stay away from the business instead of trying to bottom fish in that situation.
In 1994, Buffett went on to explain:
"So, you really want to go along with the idea of something that, if you were going to take a trip for 20 years, you wouldn't feel bad leaving the money in with no orders with your broker and no power of attorney or anything, and you just go on the trip. And you know you come back, and it's going to be a terribly strong company."
In this situation, the investor who'd been waiting two decades to get the right price would have been left wanting.
Instead, Buffett said, "I think it's better just to own them." To put it another way, it seems as if he was advocating buying good stocks when you can, rather than when the market will let you.
Unfortunately, this advice isn't black and white. There are some companies on the market today that are probably not worth buying at any price. Instead of taking the advice at face value, we need to plug it into the Buffett investing framework.
Buffett said that it could be worth buying a stock at a high price if it is a good business. How does he define a good business? Based on my understanding, Buffett likes companies that have substantial competitive advantages and are predictable - companies where it is easy to predict cash flow two or three decades out. These businesses seem to be the sorts of operations the Oracle of Omaha was referring to in 1994.
As he went on to add, "the main thing to do is to find wonderful businesses." Once you've got past this hurdle, the price paid is not necessarily so important because a good company will continue to create wealth for its shareholders year after year.
Once you have acquired a position in a good business, there's nothing stopping you from adding to the position at a later date at a more attractive price. After all, investing is not a science. It is an art, and artists are always developing and building out their styles. Investors may see better results by following the same approach.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett's 3% Discount Rate Margin
- Howard Marks: Prospective Returns Are About 'The Lowest They've Ever Been'
- Value Investing Is Not Dead, but It Has Changed
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