The logical assumption is that a good investment is an investment into a good / great company.
This however is not necessarily true, a good investment can be defined as an investment into an asset whose price is below (preferably significantly) its value, so an investment into a poor Company can be a “good” investment “if” the price on offer is below its value.
To illustrate the point.
Over the last 50 years probably the most consistently successful company has been Coca Cola.
It has:
- A world beating franchise
- Pricing power
- Global reach
- Very low costs (no reinvention costs)
- A rock solid balance sheet
- Constantly increasing dividend
In short it is a dream stock.
So how has its share price performed?
In 2000 the stock price was $66.90.
In 2011 the stock price was $70.00.
So over ten years the value of a share in a ‘GREAT’ Company has increased only marginally and in real terms it has actually fallen.
(If one takes into account dividends which increased per share from $0.68 to $1.88 then the overall return would have been positive, but only slightly).
The point being illustrated here is that a Great Company is not necessarily a great investment; a great Company at a Great Price is the aim.
The P/E ratio of Coke was 40 times in 2000 and is now around 15 times so the conclusion to an investor is.
“Price paid (in relation to value) is paramount, this more than any other factor will dictate future returns.”
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.