Previously, in my previous blog post, I wrote about finding great companies at fair prices. Sometimes it might be tempting to categorise investing as simply finding good companies.
Instead, I now argue that investing should be more weighted towards finding significantly underpriced companies.
The problem with good companies
Many Investors already know a good company with wide moats, excellent unit economics, and a big market. Companies like Google, Apple, Amazon, and Visa fit the bill.
It might be alluring to invest in these rock-solid businesses. However, the problem is that these companies are already exceptionally well priced for future growth in the increasingly competitive public markets. How likely are you to have a unique point of view that is contrarian for these companies?
The margin of safety
The margin of safety is a critical concept first mentioned by Benjamin Graham and something that has fundamentally changed my investment style. Simply put, we need to find companies below the company's intrinsic value. The discount helps to overcome your investment blindspots, external forces and the investment's performance.,
A significant margin of safety is required.
A small discount isn’t sufficient. Instead, we should find companies significantly below the company's intrinsic value. For example, Warren Buffet is known to apply a 50% discount to the inherent value as his price target.
The difficulty and fun of investing
Investing is more akin to a treasure hunt. There are 50,000+ public companies globally, and out of them - probably only 1%, 5 thousand, companies that are investable multi-baggers. So our job is to find and invest in them. Unfortunately, I have made the mistake of not having a sufficient margin of safety. So you have been warned; beware of great companies.