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Why Choosing A Stock Is Like Choosing A Diamond Ring

Are you married? If you are, do you remember the day you went diamond shopping to find the perfect ring for your wife?

I remember the day very clearly. I was looking through a lot of diamonds in the shop and realised that none was perfect. However, the smaller the flaw of the diamond, the more expensive the diamond seemed to be.

For me, shopping for a diamond ring reminds me of my time “shopping” for a stock to buy.

No Diamond Is Perfect

It is almost impossible to find the one diamond that is completely flawless. It should exist somewhere in the world, but I did not encounter one during my shopping.

This is similar when looking at companies. It is very unlikely that you will ever come across a perfect company. In every company you look into, there will always be some aspect of it that can be considered as a risk. If we run around to find the “perfect” one, we might end up having a very miserable time. The key is to find a company where we can accept both its beauty and its flaws.

You Got To Pay For Quality

As you are shopping for a diamond, you might realise that they are graded in terms of four “C”s: clarity, colour, carat and cut. The higher the grade of the diamond, the higher the price of the ring. In the end, we have to pay for quality.

In the same way, listed companies are all constantly priced by the market. As you “shop” around, you will soon realise that companies that are of high quality tend to trade at a relatively high valuation as well.

Warren Buffett once said:

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

In the end, we have to pay for quality, regardless of whether they are diamonds or stocks.

The Foolish Summary

There are many similarities between investing and diamond shopping. Being a better diamond shopper might actually help you be a better stock investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.