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GOOD business to a GREAT business is a money-making journey. This is when they have comparative advantages, a large runway of growth and generate superior returns for shareholders through a mix of earnings and multiple expansion. Most businesses, once they become GREAT also trade at GREAT Multiples and …then they falter, become too big to grow, valuations surpass reality, competition kicks in or they are disrupted etc. Our job as investors is ALSO to avoid such painful pitfalls of Great businesses becoming Good businesses.
That's why getting rich and staying rich are both important. Making money and preserving that money that was made and growing it....
Buying high-quality stocks at very high entry valuations can indeed lead to subpar returns over the long term. While it may be tempting to invest in companies that are currently in high demand and commanding lofty valuations, it's essential to consider the fundamental principles of investing. The price you pay for a stock matters because it determines your potential return on investment.
When you buy stocks at high valuations, you are essentially paying a premium for future growth expectations. The market has already priced in the anticipated success of the company, leaving little room for additional gains. As a result, even if the company continues to perform well, the stock price may not increase at a pace that justifies the initial investment.
Over time, the market tends to correct itself, and companies that were once overvalued may experience a decline in their stock prices. This correction can be triggered by various factors such as changes in industry dynamics, economic conditions, or investor sentiment. When the correction occurs, the inflated valuations can quickly revert to more reasonable levels, leading to losses for those who bought at high entry valuations.
Moreover, high valuations can create unrealistic expectations. Investors often expect a company's growth trajectory to continue indefinitely, ignoring the cyclical nature of business and market cycles. Companies face challenges and setbacks, and buying at high valuations amplifies the risk of disappointment if the company fails to meet or exceed those inflated expectations.
To achieve favorable long-term returns, investors should focus on buying stocks with a reasonable valuation relative to their growth prospects and intrinsic value. It's crucial to consider the company's financial health, competitive positioning, industry trends, and future growth potential. By investing in high-quality stocks at reasonable prices, investors can increase the probability of generating superior returns over the long term while minimizing the risk of significant losses during market corrections.
Hi friends, I am Ajay Sharma. I have been an active investor and a serial entrepreneur living in Singapore. I am an alum of IIT (BHU) Varanasi and IIM Ahmedabad. I have worked in some of the leading global corporates and am passionate about startups.
To know more about me, watch - https://youtu.be/DIfCjKLijKc
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