Time Is The Friend Of The Great Business – Not The Poor Business

During his early years of investment, Warren Buffet used to deploy the cigar butt strategy for investment i.e., he invested in companies that were priced lower than their net asset value. However, the problem with this strategy is that if a company is low-priced, they are probably in trouble.

Good companies with high returns on invested capital tend to grow faster. On the contrary, companies with low-priced shares may be cheap, but they are hardly good investments in the long run because there’s a reason why they’re cheap- they haven’t got much value or growth prospects.

If a share isn’t repaid quickly, you risk sitting in a share that doesn’t provide much return over a long period of time. If you purchase a share for $15, whose actual value is $20, it may seem like a good investment.

But if the company’s future prospects aren’t good, the situation can be wholly different. A lack of growth would mean that you would find yourself sitting on a stock where the net asset value is unchanged over time. If you can quickly sell the share for $20, that’s good for you. But if it takes you 5 years to get $20 per share, it is definitely a bad investment.

On the other hand, if you own a share for five years whose value grows by 15% every year, that’s a great investment. Time will work for the investment that delivers a good return.

Therefore, time favors businesses that have the capability to offer good returns.

On the contrary, time plays the exact opposite role for companies that don’t have the potential to deliver good returns. As more time lapses, the value of their shares continues to depreciate.