Warren Buffett once said that one of the best ways not to lose money is to buy “good companies.
The company has an understandable business. Essentially, the company has a history of producing strong earnings performance. We can show a company has an “understandable business” by verifying the following:
The company has predictable and proven earnings. We define a predictable company as one with consistent revenue and earnings growth.
The company has strong “economic moat,” i.e., the company has high gross margins and thus able to grow its business with little or no debt.
The company’s shares can be bought at a reasonable price, e.g., at an attractive price-earnings to growth ratio.
To determine good companies, we can consider four fundamental factors: quality, value, growth and momentum. Warren Buffett’s strategy focus on just quality and value: companies with strong quality also tend to have strong growth.
The quality rank captures the company’s earnings predictability and profit margin growth. Companies with high quality meet Buffett’s key criteria on “proven earnings” and “strong economic moat.”
Buffett’s “good companies” not only have high quality ranks, but also have high value ranks. The QV rank, which blends the quality and value ranks, can determine how “good” a company is. The “best companies” should have high QV ranks..
“The general who wins a battle makes many calculations in his temple before the battle is fought.”
If you get a certain kind of process going in chemistry, it speeds up on its own. So you get this marvellous boost in what you’re trying to do that runs on and on. Now, the laws of physics are such that it doesn’t run on forever. But it runs on for a goodly while. So you get a huge boost. You accomplish A – and, all of a sudden, you’re getting A + B + C for awhile.
Rule #1: The Quality Rule The quality rule is based on the common-sense notion that high-quality businesses have greater wealth compounding abilities than low-quality businesses. The problem is how to define a “high-quality business.” One of the key characteristics of a high-quality business is a long history of steadily increasing dividend payments. A company must have […]
Jason Zweig wrote In much of life, doing things right over and over again is a sign of skill; expert musicians, for instance, rarely hit a wrong note. And the skill of one professional musician doesn’t make it harder for the others to be equally expert. But in the financial markets, where so many investors are […]
Leonard is an investor who uses “value as an analytical style” to buy businesses that sell software to vertical markets.- Mark Leonard Like Buffett, Leonard think about moats, uses return on invested capital as a touchstone, prefers concentrated investments to diversification and likes it when assets he wants to own for a long time “go on […]