Stick With Quality

We visited our two daughters in Dallas last week and went out one night to find some good old fashioned southern cooking. We headed to a highly recommended restaurant but were disheartened to find the place packed. As we considered our options we noticed a similarly themed restaurant right next door with only a few people inside and no line. My first thought was “Oh good, we can get right in, the place is empty.” I then realized the foolishness of being excited about having found a restaurant that no one else wanted to eat at.
 
Stocks are often like restaurants and hungry customers like investors. The reality is that companies that are worth owning, the ones who make the most money, are usually the most expensive because everyone else wants them too. With a good product and a strong history of turning a profit, the better company’s stock is in much higher demand. Like a crowd and a full waiting room, if you want to own stock in these great firms, there is going to be a price to pay.
 
At the same time there are many companies whose stock seems to always be on sale, often selling for mere pennies. Some are tempted to buy these companies because of the low price. They rationalize that when you buy cheap the upside is so much greater. When these individuals come for advice I remind them that stocks are cheap for a reason. Thinking that you have found a great deal because a stock is cheap is like thinking you have hit the jackpot when you stumble across an empty restaurant on a Friday night.
 
As I have studied the great investors of the world, I have found that most look for high quality companies and are willing to pay well for them. They realize they aren’t going to make a killing overnight on a quality stock but they understand, as the famous investor Peter Lynch once said, “Time is on your side when you own shares of superior companies.” When markets are on fire Investors can often get away with making careless decisions, but when things get a little more difficult, it sure makes it easier to sleep at night when you are holding great companies.
 
The restaurant with no line may seem like a great find, but inevitably you will likely be disappointed in the outcome. The company whose stock is cheap because no one else wants it may seem like an opportunity with lots of potential upside, but there is likely a good reason no one is waiting in line to buy it. As the past two months have shown, the days of the stock market always going up have come to an end. The economic future still looks very good, but I suspect investors will need to be a little more selective in their investment choices, focusing more on quality, or they may wind up with some serious financial indigestion.