Sometimes, we have to smile at the challenge facing daily bloggers and the press, who have to come up with numerous headlines each day and, like kids, sometimes say the darnedest things.
CNBC.Com ran this gem on February 10, 2010: “In an Uncertain Market, Quality is King.”
We doubt that in 2005 the site proclaimed, “In a Perfectly Stable, Ever-Rising Market, Quality Doesn’t Matter,” but we wouldn’t put it past them. And we certainly understand the point CNBC.Com was trying to make.
If there is one message WCAM has been trying to emphasize in a decade’s worth of newsletters and blogs, it is this: The market is always uncertain, and therefore quality is always king. Anyone can be seduced by a bargain, and even the best investors have fallen into value traps now and then, mistaking a sharply depreciated stock price for a good value. But when we remember that the purpose of public markets is to allow individuals the opportunity to own shares of companies, it becomes clear that the company – not the market – is at the center of stock market investing.
In our book, The Entrepreneurial Investor (Wiley, 2008), chapter 17 details 10 Signs of a Strong Company. These are the qualities of quality, if you will.
1. A Simple Business Model
2. A “Wide-Moat” Competitive Advantage
3. Recurring Revenue
4. Low Inventory Risk
5. Alignment of Interests
6. A Healthy Culture
7. A Flat Organizational Structure
8. Low Reinvention Risk
9. Low Capital Requirements
10. Favorable Demographics
These features do not constitute the entire definition of quality; we present them as useful first impressions for identifying companies worthy of further investigation. We also distinguish between quality companies and quality investments. Every high-quality investment is a high-quality company, but not every high-quality company is a high-quality investment. Why? Because many high-quality companies sell at a premium price, but we want to buy great companies when they are selling at a discount to their intrinsic value. That’s a high-quality investment.