At the end of the day, it’s rather simple. If you invest at a price lower than the present value of future cash flows, you are bound to eventually earn a return exceeding your discount rate. But the further out those cash flows are, the less certain they are, which means paying for a decade or more of continued growth usually goes awry. There will always be exceptions, but it’s survivorship bias to look at microsoft, amazon, nvidia and others with the most exceptional records - and say look, investing at a very high multiple works.
To know what truly works, we have to look at what has worked. There are several answers to that - deep value being one of them, when done well - but as far as I know, no investor was ever greatly successful over multiple decades, holding a significant number of different stocks over that period (to eliminate statistical outliers who just held one or two stocks) without being pretty price-sensitive.
Even Buffett, Mr “great business at a fair price” has rarely ever bought at more than 15x underlying earnings. Indeed Todd Combs says the first of several questions they ask when they sit down together is “which businesses in the S&P 500 are trading at less than 15x normalised earnings.”
At the end of the day, it’s rather simple. If you invest at a price lower than the present value of future cash flows, you are bound to eventually earn a return exceeding your discount rate. But the further out those cash flows are, the less certain they are, which means paying for a decade or more of continued growth usually goes awry. There will always be exceptions, but it’s survivorship bias to look at microsoft, amazon, nvidia and others with the most exceptional records - and say look, investing at a very high multiple works.
To know what truly works, we have to look at what has worked. There are several answers to that - deep value being one of them, when done well - but as far as I know, no investor was ever greatly successful over multiple decades, holding a significant number of different stocks over that period (to eliminate statistical outliers who just held one or two stocks) without being pretty price-sensitive.
Even Buffett, Mr “great business at a fair price” has rarely ever bought at more than 15x underlying earnings. Indeed Todd Combs says the first of several questions they ask when they sit down together is “which businesses in the S&P 500 are trading at less than 15x normalised earnings.”