Quality At Any Price Vs Quality At Reasonable Price

Image Courtesy: Freedigitalphotos.net/mapic hai

Recently I have been reading a lot of arguments by some renowned investors and professors that buying quality business is always advisable even if you pay up as they would never be available at cheaper prices.  While their argument looks credible, I am unable to accept it completely.  When we say pay up, my question is how much and how much is reasonable?  We cannot pay any price for a quality business.  It has to be available at or below its calculated intrinsic value.  Calculation of intrinsic value is an exercise which is very subjective and no two people come up with same estimates.  Also, we can justify any price if you tweak your discount rate and or growth rate.
 While I would definitely like to hold quality businesses, my principle is to buy them only when they are available at a value which becomes a no brainer to invest.

To observe the results without any hindsight bias, I am picking two equal weighted portfolios with one having quality stocks trading at high PE and another with reasonable quality stocks trading at low PEs.

Portfolio 1 with High Quality High PE Stocks

Stock	Price	PE
Jubiliant Foodwords	1340	76
Page Industries	10743	68
Symphony	1909	62
La Opala	410	62
Berger Paints	505	53
Britannia Industries	1793	52
Pidilite Industries	484	50
Astral PolyTechnik	420	46
GSK Consumer Healthcare	5807	45
Dabur India	239	43

Portfolio 2 with Reasonable Quality Lower PE Stocks 

Stock	Price	PE
Munjal Auto Industries	113	11
Zensar Technologies	596	11
VST Tillers	1349	13
eClerx Services	1196	15
Wipro	557	16
Swaraj Engines	934	16
VST Industries	1912	17
Kaveri Seed Company	782	18
Suven LifeSciences	210	18
Tech Mahindra	2612	21

If you check portfolio two you will realize that it is not actually low PE stocks but lower PE compared to portfolio 1.

I will review the portfolio results in 1,3 and 5 year basis as time passes to check if high quality high PE strategy works better than reasonable quality reasonable/low PE stocks.