The valuation premium that high-quality businesses with durable competitive advantages command over the broad market — the extra P/E an investor should rationally pay for superior, predictable earnings.
Deeper Explanation
Munger's insight that "wonderful companies at fair prices" outperform "fair companies at wonderful prices" quantifies into the quality premium. A business with 20%+ ROIC, a wide moat, and consistent earnings growth justifiably trades at 25–35× earnings rather than the market's 15–18×. This premium is not irrational: the predictability of earnings from a wide-moat business reduces the risk premium required by investors, and the high reinvestment rate at high ROIC means each retained dollar creates more than a dollar of future value. The quality premium collapses in bear markets (when all stocks are sold indiscriminately) — which is precisely when the quality investor with dry powder should add.
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