Warren Buffett, the long-serving chairman and CEO of Berkshire Hathaway (BRK.B) (BRK.A), is well known for his disciplined investment philosophy and clear-eyed warnings about investor behavior. Among his most enduring insights is the principle that “for the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.” This quote serves as a cautionary reminder that valuation matters — even when the underlying business is exceptional.
Buffett originally made this observation in his 1982 shareholder letter, addressing a fundamental misunderstanding in investing: the belief that buying shares of a high-quality business guarantees strong returns. His message is clear: no matter how resilient or well-managed a company may be, paying an inflated price at the outset can severely diminish, or even negate, the investor’s eventual gains.
This view is consistent with Buffett’s long-standing adherence to value investing — a discipline he learned from his mentor, Benjamin Graham. Buffett’s approach centers on purchasing companies with strong fundamentals, sustainable competitive advantages, and capable management, but only when their market price is below or fairly aligned with their intrinsic value. In his view, investment performance is ultimately determined not just by what you buy, but by the price you pay.
Buffett’s credibility in issuing this warning is hard-earned. Over more than five decades at Berkshire Hathaway, he has built a track record of acquiring businesses that not only perform well operationally, but are also acquired at attractive valuations. He has frequently avoided investing in trendy or overhyped companies, even when their operational success was undeniable, if he believed their share prices were too high to justify a purchase.
In the decades since Buffett first made this statement, its relevance has only grown. Markets have seen multiple periods of elevated valuations, where investors justified high prices with expectations of continued growth. Examples include the dot-com bubble of the late 1990s, the tech-driven rally of the 2010s, and more recently, the rise of high-growth companies trading at steep earnings multiples. In many cases, the companies themselves went on to perform well, but investor returns lagged due to the high starting valuations.
Buffett’s insight applies to retail and institutional investors alike. Whether investing in a single company, an exchange-traded fund (ETF), or a mutual fund, entry price remains a crucial determinant of long-term return. Even for iconic companies such as Apple (AAPL), Microsoft (MSFT), or Amazon (AMZN) — all mega-cap firms with dominant market positions and impressive track records — investors who entered at or near peak prices have sometimes faced years of muted or negative returns.
In a market environment where enthusiasm can quickly drive prices far ahead of fundamentals, Buffett’s quote continues to serve as a guidepost for prudent investing. While quality should never be overlooked, it does not override the basic arithmetic of investing: the return on any asset depends not only on its performance, but also on the price paid to own it.
On the date of publication, Caleb Naysmith did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com