McElvaine Minutes
Shades of grey: the trade-off in every investment
Nothing worth buying cheaply is ever clean. The job is deciding whether you are being paid enough for the parts you don't like.
What it's about
If it were obviously good, it wouldn't be cheap
People would like investing to be black and white. Good companies and bad ones, buys and sells, right answers and wrong ones. It is almost never like that.
Anything genuinely cheap has something wrong with it. A bad year, a worried market, an industry nobody wants to own, a problem that may or may not be fixable. That is the reason it is available at the price. If a business were obviously excellent and obviously safe, it would already be expensive and we would not be looking at it.
So the question is never whether a company is flawless. It is whether we are being paid enough to put up with the flaws, and whether the flaws are the kind a business can survive. That is a judgement about degree rather than kind, which is why we end up weighing shades of grey instead of sorting things into black and white.
The short version
Every investment is a trade-off. We are not looking for companies with nothing wrong with them, because those are never cheap. We are looking for ones where the price more than covers what is wrong.
Keep going
Where this leads
Working out what is wrong with a business, and whether it can survive being wrong, is what the four questions are for.