Most investors make their mistakes not from picking bad stocks but instead from buying them at the wrong time. This is because many investors blindly assume that as long as the business they pick is a good business, then the underlying stock must be good too. Unfortunately, this fallacy is one that comes with an expensive price tag.

IN PICTURES: 20 Tools For Building Up Your Portfolio

Favorite Businesses
Many of us buy all books - and even other products today - from Amazon (Nasdaq:AMZN). There are not many places around that can beat Amazon's prices or its excellent customer service. Unless you have to have a book immediately, one is almost guaranteed to save a bundle by shopping Amazon instead of brick and mortar bookstores.

One of the most popular places to eat is Chipotle Mexican Grill (NYSE:CMG), a fresh fast casual chain that serves some of best gourmet burritos around. You've probably noticed that these restaurants are usually packed whenever you visit. And like millions of other people all over the world, you probably use Google (Nasdaq:GOOG) and Yahoo (Nasdaq:YHOO) every single day. Yet this doesn't necessarily mean you should go ahead and buy shares in any one of these companies.

One Word: Price
While many investors would welcome the opportunity to own them all, the single factor preventing a buy decision for many is the current price. The above companies are all fantastic businesses with amazing future growth potential. That outlook is no secret and as a result, the prices are above what many are comfortable paying. Clearly, mid 2010 would have been a great time to buy any of these names but since most of us were looking elsewhere.

So while all of the above businesses are first rate companies, that doesn't mean they are first-rate investment candidates. The determinant, of course, is price. The price you pay for any investment will determine the value obtained. As much as most of us would love to own Chipotle at a P/E of 10, you need to realize that may never happen as long as the company is on the upward slope of its growth curve. While a value investing approach is to simply buy a good business trading below intrinsic value, thus giving a margin of safety, it is important to factor in growth too. It is prudent to be highly confident that names like Chipotle and Amazon will be making a lot more money years from now. And therefore as an investor most of us would readily pay 15 times earnings for a company like Chipotle versus a lower multiple for a company like McDonald's (NYSE:MCD) that isn't growing as quickly.

Proper Discipline
In investing, discipline is everything, but you can't be so unyielding in discipline that you hold all companies to the same standard of value. In many cases, you may be better off paying a fair price for a great company than a great price for a fair one. At the same time, investors must always remember to keep their emotions in check when looking at great businesses trading at not-so-great prices. (For more, see The Characteristics Of A Successful Company.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  5. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center