I’m relatively new to this community, although I have been investing for many years.
One issue I continually revisit is the difference between owning an exceptional business and buying that business at an attractive valuation. Companies such as Apple, Alphabet, Amazon, Costco, Meta, and Nvidia may have strong competitive advantages, but even an outstanding company can produce disappointing returns if the entry price is too high.
When evaluating these companies, I look at free-cash-flow growth, returns on invested capital, balance-sheet strength, competitive advantages, and valuation. However, traditional multiples can sometimes make rapidly growing or unusually high-quality businesses appear permanently expensive.
How do you determine the maximum price you are willing to pay for an exceptional company?
Do you rely primarily on a DCF, normalized earnings, free-cash-flow yield, historical multiples, or an expected-return model? I would be particularly interested in how you incorporate a margin of safety without automatically excluding the highest-quality businesses.