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.
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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.
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.)
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