💎 Quality at a Reasonable Premium

Build a Winning Quality Growth Portfolio

When to Pay Up for Great Assets (And When You Absolutely Shouldn’t)

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If you’ve spent any time studying quality investing, you’ve likely heard Buffett’s timeless line:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

But that quote leads to a natural (and often difficult) question:

How much is too much to pay for a great business or asset?

In this piece, I’ll walk through a framework I use to decide:

• When to pay a premium for quality

• When to walk away

• And how to think about valuation in a world of compounding, durability, and opportunity cost

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🧠 The Temptation & Trap of Investing

❌ The Temptation:

You find an exceptional company — amazing margins, durable moat, excellent capital allocation — but it’s trading at 35–50x earnings, or a 2.5% yield on cost, or a very tight cap rate if it’s a private asset.

You think: “It’s so good — it’s worth the premium.”

⚠️ The Trap:

If your starting valuation is too high, it becomes a headwind that:

• Eats into future returns

• Leaves no room for error

• Turns even a great business into a mediocre investment

Just take a look at Microsoft (Great business, too high starting valuation):

So where’s the line?

Let’s build the framework.

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🔍 1. Separate Price From Payback Period

I don’t just look at a P/E multiple or yield. I ask:

How long will it take me to earn my money back in free cash flow, dividends, or capital appreciation — and what assumptions am I making to get there?

Let’s say:

• You buy a business at 40x earnings

• Earnings are growing at 20% per year

• It reinvests well and expands margins

In that case, your payback period shrinks fast — because growth and reinvestment are working in your favor.

But if:

• You buy at 40x

• Growth slows to 10%

• Margins compress

• Capital allocation falters

Now you’ve locked in mediocre returns at a high price — with no margin of safety.

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🧰 2. My 3-Part Filter: When Paying a Premium Is Worth It

Here’s what I look for before I pay a premium valuation (public or private):

✅ 1. Durable Competitive Advantage

The business should have a moat I understand — brand, regulatory edge, distribution lock-in, or extreme cost leadership.

Example:
Novo Nordisk has a massive head start in GLP-1, along with regulatory credibility.

✅ 2. High and Consistent Return on Capital

ROC should be 15%+ and stable or rising, ideally with:

• Low reinvestment friction

• Proven capital allocation history

• No need for massive dilution or leverage to grow

Example:
Kinsale Capital consistently earns 20–30% ROE, self-funds growth, and stays disciplined. Worth a premium.

✅ 3. Optionality or Pricing Power

I want businesses that either:

• Can launch new products off their core platform

• Or raise prices without customer churn

This creates hidden growth that traditional valuation misses.

Example:
Constellation Software reinvests into tuck-ins at 20–30% IRRs. You’re not just buying the core business — you’re buying a reinvestment machine.

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🧮 3. What I Don’t Pay Premiums For

Just because a business is "good" doesn't mean it’s priced for success.

Here are red flags for me:

🚫 Crowded Trades With No Edge

If everyone’s buying it for the same reason, and the valuation assumes perfection, I pass.

Think: Consumer tech darlings with 60x multiples and no pricing power.

🚫 Decelerating Growth + Premium Multiple

If revenue and earnings are slowing, but the multiple is still priced for acceleration — that’s a recipe for underperformance.

Think: Aging SaaS businesses with 5–8% growth but still trading at 30–35x.

🚫 Unproven Management or Weak Capital Allocation

Even great products can’t overcome poor reinvestment discipline.

If the CEO is buying back stock at the top or overpaying for acquisitions, I won’t pay a premium — no matter how sexy the margins look.

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💸 4. When the Premium Becomes a Discount Over Time

Here’s the magic of quality compounding:

When you pay a fair premium for a truly elite business, time turns that premium into a discount.

Let’s say you bought:

• LVMH at 25x earnings in 2015

• Or Costco at 30x earnings in 2010

• Or Blackstone at 5% yield in 2018

If those businesses continue to grow earnings at 12–20% for 10 years, you’ve made a massive gain — and your yield on cost looks incredible.

Over time, valuation matters less — as long as the business performs.

The hard part is separating the true elites from the rest:

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📊 5. My Rule of Thumb: The 3% Rule

Here’s a simple rule I use:

Only pay a premium if you believe the business will grow intrinsic value by at least 3% more per year than your next-best option.

That’s your opportunity cost buffer.

If Kinsale is growing intrinsic value at 18%/year, and another stock or private deal is compounding at 12–13% — I’m fine paying up for Kinsale.

But if the gap is tighter than 3%?
I’ll wait for the price to come back to me.

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🧭 Final Thought

Quality at a reasonable premium is the cornerstone of successful investing — but it only works when paired with:

• A deep understanding of the business

• High standards for capital discipline

• Patience to let compounding do the heavy lifting

Valuation still matters — but in the long run, business quality dominates.

You don’t need to overpay.

You just need to know when a premium is actually a discount in disguise.

Here is a free “Valuation Sanity Check” template on Google Sheets for you:

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