In June we called Microsoft a wonderful business at a fair price, and then asked for $310. Two days later the shares touched $349.20 — inside our own estimate of what the company was worth — and we were still waiting.
They were $497.93 when we wrote the follow-up.
We asked for a 12.6% discount and it cost 42.6% of return. That is a ratio of nearly three and a half to one, and the bill arrived without a single line appearing anywhere.
Why this mistake is so easy to keep making
When a limit price saves you, you can see it. The shares fall, you buy lower, and the discipline is vindicated in a way that is easy to remember and pleasant to repeat.
When a limit price costs you, nothing happens. There is no trade, no loss, no entry in any record. The business you were right about compounds without you, and the only trace is a feeling you learn to ignore.
So the two outcomes are not weighted equally in anyone's memory — and the one that is invisible is usually the larger.
| When the limit works | When it does not | |
|---|---|---|
| What you see | A trade, at a better price | Nothing |
| Where it is recorded | Your statement | Nowhere |
| How it feels | Vindication | Mild regret, then forgotten |
| Typical size | The discount you won | The whole return |
A discipline that only ever produces visible wins and invisible losses will feel like it is working, permanently, whatever it is actually doing.
And sometimes it works exactly as designed
It would be dishonest to write this without the counter-case, and we have a clean one.
In July we set an add-zone on McDonald's at $265. By September the price was $253.18 — in the zone — with the franchised margin unmoved and the 50th consecutive dividend raise due in October. The thesis held and the price came to us.
And a third outcome, which is the most common of all: our PayPal report found the shares 82% below their 2021 peak, concluded they were cheap and not a trap — and that the bargain had got away three weeks earlier. Right about the company, right about the value, three weeks late.
| What we asked | What happened | Verdict on the discipline | |
|---|---|---|---|
| Microsoft | $310, from $367 | Low of $349.20, then $497.93 | Cost us the position |
| McDonald's | Add-zone at $265 | Fell to $253.18, thesis intact | Worked |
| PayPal | Cheap, not a trap | The window closed three weeks before we wrote | Too slow |
It depends on what kind of business it is
Look at which one failed. It was not the weakest company — it was the strongest.
That is not coincidence. A good-but-ordinary business trades in a range: it disappoints, the price falls, patience is rewarded. An exceptional business grows into whatever price you refused to pay, and the better it is, the faster it does so.
So the discipline has an inverse relationship with the quality of the target. The companies where a limit price is most likely to fail are exactly the ones you most want to own.
Not abandoning limits — pricing them. Buy a starting position at a price you consider fair, and keep the remainder for the discount you would prefer.
If the shares run away, you own the business and you are annoyed rather than absent. If they oblige, you add at the better price and your average is close to where perfect patience would have put you.
It is a worse outcome than being right and patient. It is a much better one than being right and empty-handed, and it is the only version that survives being wrong about the timing — which is the normal case.
Our current limits, and what they require
| Price at our report | Our limit | Fall required | |
|---|---|---|---|
| Palantir | $190 | Begin near $110 | −42% |
| ServiceNow | $137.76 | Add below $115 | −17% |
| Abbott | $96.69 | Add near $80 | −17% |
| Realty Income | $59.57 | Two dollars from the zone | −3% |
Four rules we hold ourselves to
So it can be graded. A limit remembered rather than recorded gets quietly adjusted downward after the shares rise, and then you have no discipline and no record of losing it.
Demanding 40% off an exceptional business is usually a decision not to own it. Demanding 10% off an ordinary one is reasonable. The better the company, the smaller the discount you should insist on — which feels backwards and is not.
Fair, not cheap. This single change converts the worst outcome — being completely right and owning nothing — into an ordinary one.
Keep the list of businesses that got away next to the list where the discipline worked. Ours has Microsoft at the top of it. Without that list, a limit-price habit will feel successful indefinitely.
One that ran away from us, one that came to us, and one where we were three weeks late.
Including the follow-up in which we graded our own call in public.
Frequently asked
Should you wait for a stock to drop before buying?
It depends on the size of the discount you are demanding against the quality of the business. We asked for a 12.6% discount on Microsoft and the shares rose 42.6% instead — a twelve per cent demand that cost forty-three per cent of return. For an ordinary business a limit price usually works; for an exceptional one it frequently just means you do not own it.
What is the real cost of a limit price?
Not the interest your cash earns meanwhile, which is small. It is the occasional wonderful business that never comes back to your number. That cost appears nowhere on a statement, is invisible at the time, and is usually far larger than the loss you avoided on the trades where the discipline worked.
When does a limit price actually work?
When the business is good rather than exceptional, and the market is reacting to something temporary. We set an add-zone on McDonald's at $265 and the price came to $253 while the franchised margin had not moved — a solid business, a passing problem, a price that obliged. Exceptional businesses are the ones that outgrow your number while you wait.
How do you avoid missing good investments by being too strict?
Buy a starting position at a price you think is fair rather than waiting for the price you think is cheap, and keep the rest for the discount. You then own the business if it runs away and you can add if it obliges. It is a worse outcome than being perfectly patient and a much better one than being perfectly patient and wrong.