The key to investment success is to buy wonderful businesses. Like many great truths, it may seem obvious, but it is not. As Warren Buffett would put it: It is far better to own a wonderful company at a fair price than a fair company at a wonderful price.
The philosophical father of value investing, Benjamin Graham, taught Buffett that price is what you pay, and value is what you get. But the emphasis of Graham’s teaching was on buying cheap companies and assets, while the idea of the quality of the business was not focused upon. Graham would love to buy companies well below their liquidation value. But unless you were a liquidator, you might need to wait a long time for the price to equal value, and you might need some kind of event for it to happen.
If you were to buy a business with very high earning power however, and it would keep returning high returns year after year, the returns of the business will ultimately be the returns of the shareholders. A good business tends to increase its earnings yearly, and thereby increasing its value over time. A bad business has a high chance of getting less valuable further down the road, and consume a lot of the owners’ capital over time as well. While time is the enemy of a bad business, it is the friend of a wonderful one.