The quality mirage

Good companies don’t always make attractive investments. It depends on the price.

“Mirage” by DALL•E

Warren Buffett reckons, "It's better to buy a wonderful company at a fair price than a fair company at a wonderful price". Not only is this misleading advice, but it's also counter to what he did. When Buffett was young, he bought cheap crappy companies and made 32% a year—delicious returns. But it's difficult for him to move the needle now that he manages billions. So, he's changed his tune, and his disciples chant the above psalm. To the quality-crazed, it's usually a cop-out for lazy valuation work. But investors should dig deeper, as good companies aren't always suitable investments. Instead, returns depend on the price paid relative to the intrinsic value.

Cash doesn't know where it came from—it has no memory. When you, the investor, get dividends, it doesn't matter where they came from. It's the same cash, regardless. For example, if you have two assets that each pay $10 a year, it's irrelevant whether you think one is good or bad. You're getting the same thing …