The Expensive Truth About Cheap Investments
How bargain hunters can learn to appreciate paying for exceptional opportunities. Featured in WSJ Markets A.M. and The Globe and Mail's Market Factors newsletter.
This essay was kindly featured in the Wall Street Journal Markets A.M. by Spencer Jakab, and in The Globe and Mail, Canada’s premier business newspaper’s newsletter “Market Factors: by Scott Barlow — thank you!
For Busy Readers: While most investors begin their journeys as bargain hunters—a valuable trait that builds capital through frugal habits—the most successful investors evolve through three critical phases: seeking cheap prices, recognizing good value, and ultimately learning to pay premiums for exceptional opportunities.
Just as we wouldn't choose the cheapest dentist or the most questionable hotel, successful investing requires distinguishing between "cheap" (low price regardless of quality), "good value" (benefits that exceed the price paid), and "paying up" (investing in quality with transformative potential that focuses on what something could become rather than what it is today).
This mental transformation—from asking "How little can I pay?" to "What could this become, and is that potential worth the premium?"—represents one of investing's greatest challenges, as it goes against the bargain-hunting instincts that initially built many fortunes.
The most expensive mistake isn't overpaying for real quality; it's buying something cheap that fails to deliver value while missing opportunities that could multiply our investment by 10x, 50x, or even 100x over time, embodying the principle that what got us here won't necessarily get us where we're headed next.
Why We Avoid Cheap Dentists But Chase Cheap Stocks
Would you choose the cheapest dentist in town? The restaurant with rock-bottom prices? The cheapest used car on the lot? Most of us instinctively know the answer is no—yet when it comes to investing, many people fall into the dangerous trap of equating "cheap" with attractive and desirable.
Over the years, I've met many successful investors who got their start by intuitively looking for good deals. I'd count myself among them. This bargain-hunting disposition not only kick-started their investment journeys but also provided them with capital in the first place, since they had developed the habit of spending less than they earned. This mindset naturally resonates with traditional value investing, which many understand simply as paying less for business opportunities. But there's so much more to it than that.
The most successful investors I know have evolved through three distinct phases: seeking cheap prices, recognizing good value, and eventually learning to pay up for exceptional opportunities. This progression represents one of the greatest challenges in investing—perhaps second only to developing patience and long-term thinking.
The Allure of Cheap
For some people, seeking out deals comes naturally—perhaps from their upbringing or stories passed down from grandparents. They instinctively look for items on sale, off-season merchandise, or excess inventory that stores are eager to move. You can find the cheapest shirt or the lowest-priced shoes, but I've learned that the cheapest option doesn't always provide long-term value.
A cheap piece of clothing might need replacement much sooner than a more expensive, higher-quality item. This realization introduced me to a crucial distinction that applies across all areas of life and investing.
Cheap simply means a low price with little regard for what we're actually getting. Good value means the benefit exceeds the price we pay, by whatever measure we use. Paying up appreciates greater quality and long-term potential, focusing not on what something is today, but on what it could become. Price is what you pay; value is what you get, as Warren Buffett tells us. Sometimes we think they're the same thing, but they're not. The intellectual exercise becomes even more interesting when we consider the potential future value, which may exceed today's price by multiples. Now, we are onto something!
Lessons from Grandma's Market Wisdom
I remember walking through a farmers' market with my grandmother as a child, receiving a lesson in economics worth millions. Yet it took me years to understand what I was observing. She wasn't looking for the cheapest items—she was looking for value. These were ingredients she'd use to cook meals for our entire family. She knew that the cheapest produce was often borderline inedible or spoiled entirely.
This principle becomes obvious in other contexts. Visit a used car lot, and the cheapest car is usually the one that's been sitting there the longest—rusted, broken, leaking. We intuitively understand that the cheapest option isn't worth our attention. I owned one of these cars at some point in life, and I'd bet many value investors have too, if only to learn a priceless lesson.
Add an eager, dishonest, and motivated seller to a questionably low price, and you have an almost certain recipe for trouble. It might be a proposition that's too cheap to afford—now that's a twist.
The Stock Market Paradox
I've lost count of how many times I've heard investors say, "But the stock is so cheap! It's dirt cheap!" When I hear this, I wonder why they think differently than when buying that car. Just because a stock has a low valuation doesn't make it a good investment.
This approach of buying cheap stocks worked for some investors on some occasions—legends persist in shared investor wisdom and old investing tomes—but markets have evolved. Embracing the distinction between price and value opens our eyes to seeking higher quality from the beginning, and that's where the real opportunities lie.
The Transformation: Paying Up for Quality
Looking back at my most successful investments, the real wealth came from situations where I had to pay up for quality businesses—not because they were cheap by traditional metrics, but because of what they could become. Conversely, my biggest troubles came from opportunities that appeared too good to be true, where low prices masked fundamental problems.
As my investor friend Chris Mayer (author of 100 Baggers: Stocks That Return 100-to-1 and How to Find Them) once pointed out to me, instead of looking for fifty-cent dollars, sometimes you need to be willing to pay a dollar or more for what could become a hundred-dollar bill. This shift in thinking is particularly challenging for those of us conditioned to seek bargains. It requires focusing on potential rather than current price tags.
Warren Buffett's transformation illustrates this point perfectly. He evolved from seeking deeply discounted securities to accepting that sometimes you must pay a premium for businesses that could be worth multiples of their current value—not just double, but potentially 10x, 50x, or even 100x returns.
Simple as it sounds, it goes against the very nature that got so many of us started in investing—bargain hunting. It's a "what got you here won't get you there" moment in many investors' journeys.
Life Philosophy Mirrors Investment Philosophy
In life, we generally understand this principle. We're not looking for end-of-the-day sushi on sale or trying to find the cheapest hotel in the most questionable part of town when we want a quality experience. These experiences make great material for stand-up comedy rather than something we want to live through.
There are times—like when I was a student stretching every dollar—when budget constraints force these choices. I have memories of seeing Paris on a shoestring budget, but also more recent memories of experiencing the city when I could pay full price for quality. I wouldn't trade either experience, but they served different purposes.
The difference with investing is that opportunities are open-ended. It's not just about enjoying a great meal; you could potentially turn a dollar into a hundred-dollar bill over time. Conversely, there are certain risks that even the wealthiest can't afford to accept, and looking for the cheapest option might present exactly such a risk.
Embracing the Mental Shift
Many of us started building capital by being frugal and seeking bargains—and that's valuable. But successful investing often requires a mental transformation that might be the biggest challenge for investors, right after learning to become more patient and think long-term.
It's the moment when the strategy that got us somewhere will not get us where we're headed. We must evolve from seeking cheap prices to recognizing good value, and eventually to paying up for exceptional opportunities with transformative potential. Otherwise, we risk not only getting stuck but perhaps even slipping back uncomfortably close to where we started—in accordance with the saying "buy cheap, buy twice."
This journey—from cheap to value to paying up—represents a fundamental shift in perspective. We move from asking "How little can I pay?" to "What am I actually getting for this price?" to finally "What could this become, and is that potential worth the premium?"
We must learn to embrace paying up sometimes, recognizing that in both life and investing, quality often comes at a well-deserved premium.
The Bottom Line
The key is developing the wisdom to know when cheap truly represents value and when it's worth paying more for something exceptional. This discernment—between price and value, between false economy and genuine opportunity—can transform not just your investment returns, but your entire approach to life.
After all, the most expensive mistake is often buying something cheap that doesn't deliver the value you need, while missing out entirely on a full-priced opportunity that could produce tenfold or hundredfold returns over time.
As counterintuitive as it sounds and as challenging as it may seem, we intuitively know how much truth there is to this principle—and what great opportunities lie beyond when we accept that what got us here won't get us where we're headed next.
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Disclosure:
Blue Infinitas Capital, LLC is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.