A Good Company Is Not Always a Good Investment
Many Australians build their share portfolios around familiar “blue-chip” companies. The thinking is understandable: Commonwealth Bank, Woolworths and other household names are large, profitable businesses that have survived many economic cycles. Surely, owning Australia’s biggest companies must be the safest way to invest?
Unfortunately, it is not that simple.
A company can be an excellent business but still be a poor investment if its shares are purchased at too high a price. Investors must consider not only the quality of the company, but also the valuation being paid and the future growth already assumed in that valuation.
The price you pay matters
One common valuation measure is the price-to-earnings ratio, or P/E ratio. It shows how much investors are paying for each dollar of a company’s annual earnings.
A higher P/E ratio may be justified when a business can grow its earnings strongly for many years. However, paying a very high multiple for a mature company with limited growth can leave investors exposed.
Commonwealth Bank is a good example. CBA is widely regarded as Australia’s strongest retail bank, with a valuable customer base, a leading digital platform and an impressive operating history. However, it has also been described as the world’s most expensive major bank, based on measures such as its P/E and price-to-book ratios. Its quality is not really in dispute—the question is whether investors are paying too much for that quality.
The danger became clear in May 2026, when CBA shares fell 10.4% in one day after a trading update disappointed the market. The business did not suddenly become a bad bank. Rather, an expensive share price left little room for results that failed to meet very high expectations.
Woolworths presents a similar lesson. It remains one of Australia’s dominant supermarket businesses, but its earnings growth over the past decade has been modest and uneven. Despite this, in July 2026 its shares were trading at approximately 27.5 times expected earnings—around a 39% premium to the broader industrial market. Investors are therefore paying a growth-company valuation for a mature retailer whose long-term growth has been relatively limited.
Where is the margin of safety?
A “margin of safety” means buying an investment at a price sufficiently below a reasonable estimate of its true value. This provides some protection if earnings disappoint, interest rates rise, the economy slows or investor sentiment changes.
When a company is priced for near-perfect results, that protection may not exist. Even if profits remain stable, the share price can fall simply because investors are no longer prepared to pay such a high multiple.
This is why a large company is not automatically a safe investment. Size may reduce the risk of business failure, but it does not protect shareholders from overpaying.
A sensible portfolio should therefore consider business quality, valuation, expected growth and diversification. Familiarity should never replace proper analysis.
The key lesson is simple: do not ask only, “Is this a good company?” Also ask, “Is it a good investment at today’s price?”