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The Equitymaster Research Digest

Opportunities from Scandal, Excitement at StockSelect, and More...
Feb 24, 2016

Great companies are a problem.

On the surface of it, this might not make much sense. So allow me to explain...

Great companies, of course, have all the qualities of a great business - an unbeatable moat, a sound business model, healthy financial records, hardly any debt on the books, robust dividend payouts, etc.

So what's the problem?

The challenge is buying them at the right price. These companies tend to be widely tracked. And because of the inherent strengths of the business, the stocks of these companies command premium valuations.

The general perception, therefore, is that these stocks can be bought anytime since the prices will always go up.

This logic is fraught with risk. No doubt such stocks have the potential to reward shareholders immensely. But only if they have been bought at a reasonable price. Because during volatile times - such as now - not even the stocks of good quality businesses are spared. Many such stocks have corrected sharply from their 52-week highs in the past several months during the broader market sell-off.

Which brings me to one of the major gripes of ValuePro subscribers: stocks that we recommend to 'Buy at Lower Prices'. Sometimes this requires a correction of more than 30%. One subscriber, infact, stated that only during the occurrence of rare events or market crashes during the 2008 crisis, will the quantum of correction for 'great businesses' be so huge.

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