Those not familiar with the difference between a good company and a good investment often think the two are one and the same. It is important to clearly understand the differences.
Peter Lynch of Magellan Fund fame was known for getting ideas for good investments from his wife’s views of goods and services she had experienced. If she really liked a store or a product, Lynch researched the stock behind the good or service as a potential investment. The key point is that the good review of the product or service by his wife was the first step in his process. He didn’t just immediately go out and buy the stock.
Good companies are not always good stocks for many reasons. For example, their product might be unbelievable, but they are steadily and consistently losing money. Also, like a good product, the stock price may be too high. A great meal may be a fantastic deal at $10, but it is a bad deal, if the cost is $1000. So, if the stock is selling at a price earnings (P/E) of 200, it may be a bad deal.
On the other hand, a bad company can be a good investment because it is so darn cheap.
Successful investing requires buying stocks at less than they are worth. A good company bought at a low price can be a great deal. The same goes for a bad company bought at a low price. A good or bad company bought at a very high price could be a disaster.
As you’re parents always told you, “Think before your step!”
