🥇Quality is essential for investors.
Only a few companies are able to compound wealth at superior rates of return for a very long time.
Here are 10 lessons from 20 years of quality investing ,🧵⬇️
Only a few companies are able to compound wealth at superior rates of return for a very long time.
Here are 10 lessons from 20 years of quality investing ,🧵⬇️
1️⃣ Pick great stocks and let them work for you
Quality stocks have the following characteristics:
▪️ A strong moat
▪️ High returns on invested capital (ROIC)
▪️ Pricing power
▪️ Strong free cash flow generation
▪️ Robust margins
Quality stocks have the following characteristics:
▪️ A strong moat
▪️ High returns on invested capital (ROIC)
▪️ Pricing power
▪️ Strong free cash flow generation
▪️ Robust margins
Every stock you buy should have these characteristics.
When a quality stocks is able to grow its revenue and free cash flow at an attractive rate, you've found a (potential) compounding machine.
When a quality stocks is able to grow its revenue and free cash flow at an attractive rate, you've found a (potential) compounding machine.
2️⃣ Know what you own
Only focus on the highest quality companies in the world.
When you don’t understand the business model of a company, you can skip the company right away and put it in the ‘too hard’ pile.
Only focus on the highest quality companies in the world.
When you don’t understand the business model of a company, you can skip the company right away and put it in the ‘too hard’ pile.
3️⃣ Trust your instincts on management
Great managers have the following characteristics:
▪️ Desire to invest with a long-term mindset
▪️ Ability to allocate capital efficiently
▪️ Skin in the game
Great managers have the following characteristics:
▪️ Desire to invest with a long-term mindset
▪️ Ability to allocate capital efficiently
▪️ Skin in the game
Managers tend to do what they are paid to do.
Are they paid to think about return on capital, or just grow earnings?
Take a look at how they are paid and if you don’t like it, stay away from it.
Are they paid to think about return on capital, or just grow earnings?
Take a look at how they are paid and if you don’t like it, stay away from it.
4️⃣ Benchmarks are risky
Benchmarks themselves are inherently risky.
If you hug the benchmark, you’ll deliver benchmark-like returns (at best).
Benchmarks themselves are inherently risky.
If you hug the benchmark, you’ll deliver benchmark-like returns (at best).
Many strategies are successful in the long term:
▪️ Quality investing
▪️ Low volatility investing
▪️ Owner-operator stocks
▪️ ...
Pick a strategy that suits you and stick to it.
It's the only way to become successful.
▪️ Quality investing
▪️ Low volatility investing
▪️ Owner-operator stocks
▪️ ...
Pick a strategy that suits you and stick to it.
It's the only way to become successful.
5️⃣ Risk management is important
Many academics measure risk by volatility.
However, this isn't real risk.
Risk is the chance you'll permanently lose money.
Many academics measure risk by volatility.
However, this isn't real risk.
Risk is the chance you'll permanently lose money.
When you want to become a great investor, focus on risk management first and returns second.
6️⃣ Dare to say 'No'
What you don’t own is just as important as what you do own.
As a quality investor, you don’t want to invest in cyclical stocks like commodities or low margin stocks.
What you don’t own is just as important as what you do own.
As a quality investor, you don’t want to invest in cyclical stocks like commodities or low margin stocks.
Focus on quality stocks in quality sectors.
Sectors like healthcare, software, and consumer staples.
These sectors have proven to offer attractive returns as well as downside protection.
Sectors like healthcare, software, and consumer staples.
These sectors have proven to offer attractive returns as well as downside protection.
7️⃣ Express your conviction
Show your conviction in your portfolio.
It doesn’t make sense to focus on your thirtieth best idea.
Show your conviction in your portfolio.
It doesn’t make sense to focus on your thirtieth best idea.
Instead, focus on your best ideas and put the most money in those stocks.
8️⃣ Valuation matters
Even great companies aren’t great investments if you pay too much.
Even great companies aren’t great investments if you pay too much.
The free cash flow yield is a great way to look at the valuation of a stock.
Most things you want to own come your way eventually, even it is way too expensive right now.
Always be patient.
Most things you want to own come your way eventually, even it is way too expensive right now.
Always be patient.
9️⃣ Think on the long term
Trying to beat the market every year is futile.
Trying to beat the market every year is futile.
What matters is winning over years and decades.
The best investors focus on the long term.
The best investors focus on the long term.
🔟 Remain curious
Samuel Johnson once said: “When a man is tired of London, he is tired of life.”
Samuel Johnson once said: “When a man is tired of London, he is tired of life.”
You can say the same about the stock market.
The secret to success in the stock market is to remain curious and continue to ask the right questions.
The secret to success in the stock market is to remain curious and continue to ask the right questions.
This thread was based on a paper of Morgan Stanley.
An overview of 10 lessons learned from 20 years of quality investing:
An overview of 10 lessons learned from 20 years of quality investing:
If you liked this, you'll love our website.
▪️ Each Tuesday we share 5 investment insights
▪️ Each Thursday we publish a deeper investment article
qualitycompounding.substack.com
▪️ Each Tuesday we share 5 investment insights
▪️ Each Thursday we publish a deeper investment article
qualitycompounding.substack.com
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