Investment Philosophy: Quality value investing
We are Quality value investors, in that order. Quality comes first and must be evident before we even think about the valuation. We agree with the great Charlie Munger that “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns”.
What does that mean to us? Well, it means that a business has to be able to generate an above average return on equity capital employed and retain some of this, to help grow the business over time. If this is done well, with the business continuing to generate these high returns, then we have a business whose share price will grow by a similar amount over time.
How do we assess Quality and value?
There are many definitions of “quality” when it comes to investing. What makes us different is the quality test we use to screen all listed companies in the UK. We are looking for businesses which have high returns on equity and capital, low or no debt and high cash generation and conversion.
We also assess the company management, the operational margin of safety and the 'business moat' which protects products and services from competition.
Investing in quality businesses can make poor investments if the investor overpays at purchase. In this instance, the investor has to wait for the business to grow and support the high valuation. During this time, other investment opportunities can be missed or the value of the business can fall.