The hardest part of value investing is the discipline to only buy what you want when the price is attractive. I use this same approach in my personal expenditures, too. That means, from time to time, something you want gets away. It used to be a lot harder, but now it has become second nature.
For the past six days, I had put a bid on a rare limited edition Le Creuset Coastal Blue 5 quart oval French Dutch Oven. I had bid up to $285 plus shipping on it and watched auction, knowing that it was the sort of item that someone would wait to bid on in the last second, emerging from stealth to grab it. Still, I was not willing to pay more than the price I had set.
With only 6 seconds to remain, I was still the winning bidder.
However, in the few seconds that remained, I was outbid. I could have won with only $295 on the bid had I pressed “submit” within the final 3 seconds. It was only $10 more than my price. Even though I’ve spent most of my life training myself not to buy when things are above the cost I am willing to pay, Charlie Munger’s warning about open outcry actions was right: Human nature kicks in and you find yourself bidding more.
The phenomenon isn’t much different than what happens to a lot of inexperienced investors in the stock market. ”I know the business is worth $50 per share, but it is really so bad if I pay $80 per share? It’s such a good business … I want to own it. I don’t want to lose my opportunity to buy into it.” While there are a handful of businesses in the world where slightly overpaying is still probably going to work out really well – a 10% premium to the intrinsic value of Johnson & Johnson at 12x earnings in an environment like this, when compounded 25 or 50 years from now, is likely to be a rounding error on the ultimate wealth accumulation – those are the exception, rather than the rule.
Stick to your price. Patience really is the greatest virtue when it comes to the value investing game. The lower your costs, the higher your profits. Every penny counts. Every dollar counts. This is true when furnishing your home, finding inventory for your store, bidding on real estate, or selecting shares for your portfolio. That does not mean refusing to pay up for quality – lifecycle costs matter and it is almost always cheaper to pay more now for something that will last.