A good return starts with a good buy

A rule that the most celebrated investor in the world, Warren Buffett, preaches is that paying fair prices for good businesses will increase the odds of investors perform well in time.

Yet in the beginning of my professional career, as a manager of a pharmaceutical products distributor, the same was repeated by the commercial manager: a good sale begins with a good purchase! In fact such a rule is pretty basic, ancient and correct.

But what characterizes a fair price or a good purchase?

In any purchase transaction four aspects are involved:

1)    The value (how much the asset, product or service is worth);
2)    The asked price (by the seller);
3)    The targeted gain (by the buyer); and
4)    The available time (of both).

Value is always relative to something similar or of significance. The first is easily perceived by just checking the value of comparable items or assets. The second, of intrinsic nature, is related to the value of such asset, product or service to the buyer and its business. An example would be a site to set up a store, which based on investigations, is the place. In this case – the value for the buyer and its business – is even higher than in the market.

Asked price is just a reference that can be validated or estimated.

The targeted gain – linked to the use that will be given to the asset, product or service – is fundamental to calculate the “fairness” of the price to be paid. Time is a factor that increases or reduces the price to be paid for the object (asset, product or service). Time is related to the negotiation per se, or yet, how much time one has to negotiate and also with the time to return the investment. Whomever is more in a hurry to finalize the negotiation will be more open to make concessions, nevertheless, such a person will be less reliable as in pressure may close the deal with the one that is willing to close the deal more rapidly. In relation to the time of return on the investment, as a general rule, in case the target for the return is short –a speculation or price arbitrage (a purchase to a fast sale, making a fast profit) – there will be less flexibility in price but, however, if the term of return is longer, the flexibility increases.

“It’s no good, it’s no good!” says the buyer, then goes off and boasts about the purchase.” (Book of Proverbs)

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