“You should always buy the stock of a good company.” In isolation, this seems a very valid statement.
But look at this – “You should always buy the stock of a good company, whatever the price.”
Now, this is a highly dangerous advice to give to someone.
A great company can translate into a great investment. But all great companies do not translate into great investments.
Confused? Well let me clarify.
There is a business behind a company. And there is a great business behind a great company – one that has all the ingredients of success, enjoys pricing power, generates a lot of free cash flow, is not much troubled by competition, and has a very good management team at helm.
So this business has a great value. But it will make a great investment only if it is bought at a reasonable price.
“But how do you know what is a reasonable price?” you may ask.
[Read more…] about Intrinsic Value: The Holy Grail of Value Investing