📖Warren Buffett

Wonderful Company at Fair Price

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Overpaying for a great business beats getting a bargain on a mediocre one.

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It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

— 1989 Berkshire Hathaway Letter to Shareholders，1989

🏠 Everyday Analogy

When buying a house, it is better to pay a reasonable price for a quality property in a prime location than to seek bargains on unfinished projects in remote areas. Properties in good locations preserve and increase in value, while unfinished buildings are traps no matter how cheap they are. The same principle applies to investment: even if excellent companies are slightly more expensive, their long-term returns far exceed those of cheap, mediocre companies.

📖 Core Interpretation

Buying a great company at a reasonable price is far better than buying a mediocre company at a cheap price. This marks a significant shift in Warren Buffett's investment philosophy from "cigar butt" investing to focusing on "wonderful businesses."
💎 Key Insight：Early in his career, Buffett bought cheap stocks of poor businesses (cigar butts). He learned that time is the friend of the wonderful business and the enemy of the mediocre. A great company bought at a fair price compounds wealth for decades. A mediocre company bought cheaply gives you one puff of value, then disappoints.

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❓ Why It Matters

Even if mediocre companies are cheap, their long-term returns are limited. The intrinsic value of excellent companies grows continuously over time, making time an ally.

🎯 How to Practice

Key Insight: The "reasonable price" of an excellent company may not appear cheap at first glance, but it proves cost-effective in the long run.

🎙️ Master's Voice

It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
Buffett learned this lesson from Charlie Munger. In his early days, he bought cheap "cigar butt" stocks. See's Candies changed his mind—he paid 3x book value for a great business and it produced amazing returns. Quality beats cheapness over time.

⚔️ Practical Guide

✅ Decision Checklist

  • Is this a wonderful or mediocre business?
  • Would I pay a premium for exceptional quality?
  • Am I avoiding great businesses due to price?
  • Will business quality overcome valuation over time?

📋 Action Steps

  1. Prioritize business quality over valuation
  2. Pay fair prices for exceptional businesses
  3. Avoid cheap stocks in dying industries
  4. Hold quality companies through overvaluation

🚨 Warning Signs

  • Buying cheap stocks without quality analysis
  • Missing great companies due to valuation
  • Selling quality companies because they're "expensive"
  • Focusing only on low P/E stocks

⚠️ Common Pitfalls

✕A good company is not one you buy at any price—"reasonable" does not mean "any price will do."
✕Mediocre companies are not always off the table—they may be worth considering if priced cheaply enough.

📚 Case Studies

1
See's Candies (1972)
The acquisition appeared not inexpensive at the time (3x P/B).
✨ Outcome：However, its brand pricing power has enabled it to deliver consistently high returns over 50 years.
2
Coca-Cola (1988)
At the time of purchase, the P/E ratio was approximately 15x, which is not a "cigar butt" price.
✨ Outcome：The brand's economic moat made it one of Warren Buffett's most successful investments.
3
Berkshire Hathaway Textile Mills (1989)
The acquisition price was very low.
✨ Outcome：However, due to intense industry competition, it ultimately ceased operations due to sustained losses.
💡 Lesson：Cheap but mediocre companies are often traps.

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