Great Companies Can Be Bad Investments

Its 1:20 PM in the afternoon and I’m looking at the ceiling. Trying to make sense out of all this, while waiting for our lunch to get cooked by my wife, I was thinking… “Can great companies be bad investments?” and inversely, “Can bad companies be great investments?”

We’ll first state the obvious, great companies being great investments. We all know the Jollibee’s the Ayala Land and the SM when they were starting out. If you were one of the few who spotted a great company (and hold on to it), you have yourself a pretty comfortable life right now. These are the obvious great companies that are great investments.

There are other variations:

  • Great companies, great investments
  • Great companies, bad investments
  • Bad companies, great investments
  • Bad companies, bad investments

Of course, it would be great if we could focus on the great companies that are great investments. But sometimes, life isn’t that easy. Great companies are great investments when they were cheap and they were not great companies back then. Or no one knew they would become great companies. When a company actually matures and become “great” the investment may not be so great.

What makes a great company?

We all know the obvious answer to that. Brilliant management, good balance sheet, competitive advantage and possibly a growing earnings. And its pretty easy to spot them. Which makes it also easier for other people to spot them.

What makes a great investment?

There’s only one reason: price.

A great company may or may not be a great investment, it just depends on the price. A bad bankrupt company can be a great investment, it just depends on the price. And value investor‘s focus is more on the great investments rather than the great companies. The reason for that is because, buying a great company is so popular and by the time you see it, it may not be a great investment anymore. And this is sometimes the mistake most new investors make. They buy something because they know its a great company. But even if they bought a great company, the price they paid will reflect the return on their investment. New investors buying blue chip stocks thinking that they are great investments. Only to have a mediocre return because they have paid dearly for the stock.

Here’s the thing, great companies demand higher price. And it will seldom sell for a discounted price. People want quality, not only in stocks, but also in other things.

I am not saying you should buy just bad and cheap companies. I am saying that, there’s money to be made in cheap companies. And there’s money to be lost in blue chip quality stocks. It just depends on the price you paid for the investment. How well you can estimate that price is what this game is all about.

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