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Performance of Buy Good Business Approach


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This approach has some nice appeal versus buying cheap stuff but I have no idea about what the performance of this approach versus lets say the S&P 500.  The only market benchmark I know of is MOAT.  MOAT did well when it started but has been lagging recently.  Does anyone have 5-yr + performance examples of this type of approach.  Thanks.

 

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GMO Quality institutional mutual fund may be what you are looking for. It is actively managed, but it is oretty slow moving and its approach is based on ROE, leverage, margins, and stability of ROE and margins. It attempts to give exposure to the "quality" factor.

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But doesn't Mecham invest in companies like Bank of America, Cimpress, Sony and Outerwall, more turnarounds versus quality growth?  It would be interesting to see an attribution analysis to see returns from these versus more quality names.

 

GMO Quality has actually trailed the S&P500 for 5 & 10 years.

 

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But doesn't Mecham invest in companies like Bank of America, Cimpress, Sony and Outerwall, more turnarounds versus quality growth?  It would be interesting to see an attribution analysis to see returns from these versus more quality names.

 

GMO Quality has actually trailed the S&P500 for 5 & 10 years.

 

Packer

 

I would put OUTR and Cimpress into the quality pocket, only Sony was a true turnaround. But in general he seems to favor businesses with high RoIC and insider ownership/management qualities.

But i may be wrong, perhaps he can answer that himself, i think he is a reader of this board. :)

 

EDIT: And maybe even Sony was a quality investment given the value of pictures+music.

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GMO Quality has actually trailed the S&P500 for 5 & 10 years.

 

Packer

 

Yep, wasn't recommending it or anything but as far as an easy to put on and track "quality index" that has a real world track record, it's the best I can come up with. Maybe some vanguard funds too like Windsor or dividend appreciation could be considered.

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But doesn't Mecham invest in companies like Bank of America, Cimpress, Sony and Outerwall, more turnarounds versus quality growth?  It would be interesting to see an attribution analysis to see returns from these versus more quality names.

 

GMO Quality has actually trailed the S&P500 for 5 & 10 years.

 

Packer

 

I would put OUTR and Cimpress into the quality pocket, only Sony was a true turnaround. But in general he seems to favor businesses with high RoIC and insider ownership/management qualities.

But i may be wrong, perhaps he can answer that himself, i think he is a reader of this board. :)

 

Maybe I should clarify quality as compounders.  Cimpress maybe on the edge of that but it is in a pretty tough business.  Outerwall is clearly in a declining industry which IMO would not be included in the compounder camp. 

 

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ValueAct? But even that is not completely "Buy Good Business".

 

MOAT is probably closest, though it also has dogs like WTW  ::) if I remember correctly.

 

Edit: They don't have WTW anymore. Looking at the holdings, I am not sure I can classify them all as having "moat". But probably it's as good as it gets in non-active portfolio. http://www.vaneck.com/market-vectors/equity-etfs/moat/Holdings/

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ValueAct? But even that is not completely "Buy Good Business".

 

MOAT is probably closest, though it also has dogs like WTW  ::) if I remember correctly.

 

Edit: They don't have WTW anymore. Looking at the holdings, I am not sure I can classify them all as having "moat". But probably it's as good as it gets in non-active portfolio. http://www.vaneck.com/market-vectors/equity-etfs/moat/Holdings/

 

I think Sequoia is probably the best proxy for the quality approach. I like Value Act, but Uben gets on the board and does some shareholder activism. Moat gets too sector concentrated, i.e. energy when it re balances 4 times a year. I think VIG may be a better proxy for buy and hold of good business as opposed to MOAT.

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I asked myself this question quite awhile ago and couldn't find satisfactory professional/institutional examples.  Peter Lynch first came to mind, but he was too eclectic.  Interestingly, there's not much on Philip Fisher's actual long-term returns.

 

Maybe Claude Shannon?  From the "Shannon's Portfolio" chapter of Fortune's Formula:  "We've been involved for about 35 years.  The first few years served as a kind of learning period--we did considerable trading and made moderate profits.  In switching to long term holdings, our overall growth rate has been about 28% per year."

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ValueAct? But even that is not completely "Buy Good Business".

 

MOAT is probably closest, though it also has dogs like WTW  ::) if I remember correctly.

 

Edit: They don't have WTW anymore. Looking at the holdings, I am not sure I can classify them all as having "moat". But probably it's as good as it gets in non-active portfolio. http://www.vaneck.com/market-vectors/equity-etfs/moat/Holdings/

 

I think Sequoia is probably the best proxy for the quality approach.

 

+1

 

Sequoia is the best proxy for quality (identified both quantitatively and qualitatively) along with a concentrated portfolio and with a large dose of common sense.

 

Quality without concentration or common sense  - Jensen Fund

 

Quality indexing (quantitatively driven) without concentration - GMO Quality

 

Vinod

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Glenn Greenberg, Lou Simpson, Don Yacktman, Sequoia, Tom Russo. In Canada, Donville Kent is a pure play on quality growth. His performance so far is spectacular but doesn't have sufficient history.

 

I disagree with you on Mecham. Especially on Cimpress, which is my top holding.

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This would be very hard to find. First you must determine what makes a good business. Is it steady/high margins, high returns on capital, companies that consistently generate more FCF than net income?

 

Much of what makes a business good is quantitative, but cannot be easily measured quantitatively by an outsider. You have to have a broader view than what GAAP presents, because it is extremely conservative for some of the most compelling businesses out there.

 

But then you get into a realm of cherry picking, if you don't have some rules to go by. Challenging situation.

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I asked myself this question quite awhile ago and couldn't find satisfactory professional/institutional examples.  Peter Lynch first came to mind, but he was too eclectic.  Interestingly, there's not much on Philip Fisher's actual long-term returns.

 

Maybe Claude Shannon?  From the "Shannon's Portfolio" chapter of Fortune's Formula:  "We've been involved for about 35 years.  The first few years served as a kind of learning period--we did considerable trading and made moderate profits.  In switching to long term holdings, our overall growth rate has been about 28% per year."

 

I thought Shannon's returns were all due to large Teledyne holding.

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Guest longinvestor

This would be very hard to find. First you must determine what makes a good business. Is it steady/high margins, high returns on capital, companies that consistently generate more FCF than net income?

 

Much of what makes a business good is quantitative, but cannot be easily measured quantitatively by an outsider. You have to have a broader view than what GAAP presents, because it is extremely conservative for some of the most compelling businesses out there.

 

But then you get into a realm of cherry picking, if you don't have some rules to go by. Challenging situation.

 

+1

 

The real meaning of the term "quality" is perhaps the same as "durable competitive advantage" as used by Munger/Buffett. The starting point is that you "know" this quality first, either through personal experience (like the 12 year old Buffett selling Coke) and / or through a lifetime of serial learning through reading. GAAP is hardly the starting point.

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There are very very few true practitioners out there and everyone has a different definiton of quality or moat (most misused and over used investing phrase/concept) so finding "proof" of the concept is difficult. KC has a decent list. I would imagine quality companies have gone out of style during the bull market. For every 100%-200% increase in P&G or PEP there was a 500% increase in CAT and 1,000% in Manitowoc. There is no guarantee that the market will continue to undervalue quality or that the market won't undervalue another stable stream of earnings to a greater degree than quality stocks.

 

#1 Don't Lose Money #2 Make 15% on capital (I don't forget rules so I have a more relevant #2 haha). Quality stocks just make sense from this perspective.

 

The leading academic is at U of R (Robert Levy-Marx) and he has a bunch of papers trying to classify quality companies to further narrow his conclusions that they outperform consistently (basically, he argues the market ignores quality, which I fully subscribe to).

http://business.uic.edu/docs/default-source/finance-dept.---papers/the-quality-dimension-of-value-investing.pdf?sfvrsn=2

http://rnm.simon.rochester.edu/research/OSoV.pdf

https://scholar.google.com/scholar?es_sm=93&biw=1366&bih=643&bav=on.2,or.&bvm=bv.96952980,d.cWw&um=1&ie=UTF-8&lr&q=related:OjauV1z4ktZbTM:scholar.google.com/

 

 

My own opinions on quality investing (since it is my preferred strategy at the moment):

The major problem is how subjective defining "quality" is. If you go with pure quantitative research you are going to end up biting on a lot of head-fakes (no different than buying based on stock screener results). Either way, I'm convinced it is by far the most consistent and conservative method (see excel files). I think the best practitioners are stingy with their quality stamps of approval.

 

I keep a list of quality companies and maintain it frequently. It's currently around 50-60 names, about 50% are large/mega caps and >25% are small/micro caps (I've found that moats tend to be niche businesses or are wildly successful - general outcome is See's Candy or GEICO/Coca-Cola). While researching the company (not numbers, the company) I like to identify:

1) Who is the customer (narrow part of the general, how do they make their money?)

2) How large is the potential market

3) What is their market share (if it is low, why?)

4) Is this a local/regional/national/global market (not necessarily where they sell currently but where they could potentially sell)

5) Has there been any new competition

6) Why do they have an advantage (patent/law/certification/better value/low costs/ect)

7) How much would it cost me to overtake them

 

I think #7 is ultimately where you find moats. A company with a moat may or may not be excessively profitable at the moment, and probably won't be excessively profitable if it's cheap. If the company truly has a moat then margins/revenue will eventually revert to mean (think MCO/MHFI in 2008-2009 when companies were issuing less debt simultaneously while the MBS market halted - earnings power was significantly greater than earnings at that point).

 

Quality investing is an art (one I'm trying to get better at, quickly). Any attempt to make it a science will lead you to failure. I think a lot of mathematical methods can be incorporated (such as classification, basic criteria, research rigor) to improve research productivity and standardize your target investments, but ultimately it is an art. My best investments were obvious 10-15 minutes into the research [of the company] and everything after that was confirmation of my suspicions.

 

The "best" moats have near-100% market share without anti-trust suits. Everyone should be in near-unanimous agreement that this is the best solution to a problem (preferably one that leads to a standardized solution). WD-40, KO, FICO, NKE, ADBE, SLP, ELDO are some examples that come to me immediately as having near 100% market share in their various niches (whether locally, nationally, or internationally). Growth comes from pricing power which can be extremely predictable and almost always surprise to the upside (McDonald's goes from $1 menu to $2 menu).

 

What is a "quality" company? It's easier to start with examples:

Government approved monopolies are a great place to start:

* You need to research why the law exists?; does it still provide the value intended?; what is the outlook or environment like?

    - MCO/MHFI

    - MLB/NFL/NBA/NHL

    - Companies benefiting from the Jones Act

    - SpaceX: They are only going to let certain folks launch rockets

    - SIRI: Again, there can only be so many satellites and it's not the easiest approval process [unlike managing money :)]

    - Every company that relies on patents (whether normal FDA drug approval process, orphan drugs, device makers, non-healthcare companies, ect)

        * These are temporary and they generally lose excellent ROIC within 1-2 years post-expiration

    - MON: Sometimes change happens so fast (and predictably) that patent expiration is less of a worry. Monsanto has biological effects on their side as their seeds tend to change the composition of the soil such that you can only grow MON seeds the next year (quality investing is littered with companies of questionable ethics)

    -- However, gambling is an example of how quickly govn't approved monopolies can go bad. As Munger often says, follow the incentives. Every state watched as Nevada funded their entire budget from a single street in Las Vegas and envy leached all the profits from gambling everywhere. Stability is more important the depth or breadth when considering an economic advantage.

 

Semi-government monopolies or Problems that required a single solution (all companies solve a problem; is the problem meaningful and is the solution elegant?):

* This is the good stuff! Find companies where their product/service is geared towards something 1) necessary or consistently in-demand. Often, where the problem of (1) leads to a shared or non-unique solution that 2) significantly improves the experience of (1) [huge value-added product/services - e.g. KO improves drinking, P&G improves hygiene,

    - FICO: Creates the "standard" formula for credit checks (and to some degree, background checks)

        * The average person is not comfortable thinking in ranges. A single number is necessary in a lot of parts of life that are truly ranges.    Generally, this results in a strong business or monopoly for the last company standing in these situations.

    - EFX/TransUnion/Experion - Everyone needs background/credit reports

    - AXP: creating a payment network is difficult (chicken and egg problem). AXP created one tailored for the upper-class by adding discounted premium services

    - CLB: Extracting oil is difficult. CLB has the best solution that had enough breadth to turn a fragmented software market into a monopoly

    - MA/V/PYPL

    - OTCM

    - SLP

    - TDG: This is more semi govn't approval. The certification process is so expensive and long that most parts are minimally profitable (most aircraft designs are not as popular as the Boeing 747, for instance). TDG identified the best value aircraft designs and received sole-approval for the majority of the parts for those designs. This gave them access long periods of monopolistic markets. This spills into management capability and other aspects.

 

Network Effects (They built it, people came, and now every new customer has no choice but to join the network):

* To claim a company has network effects, it should already have at least a majority market share (>50%) as the pricing power before market domination is minimal or they are price taker

    - Ebay [Marketplace]: The original network effects poster-girl.

    - V/MA/PYPL

    - CME

    - CHRW: Gaining market share every year as the market goes from a word-of-mouth business to CHRW becoming the ebay/craigslist of trucking. Exception to 50% market share rule as they dominate in market share (>4x closest competitor?)

    - FB

    - TWTR/SnapChat/YouTube

 

Other types of moats that are possible. Just because Morningstar lists some ways for moats to form does not mean that these are exclusively the only ways. There is also no implication that a moat exists because a business has a similar business model. Every company & market is unique [mathematical definition]). Some less profitable ones include:

- High-Switching Costs (I think this is a pretty poor moat-type as it implies that there is a possibility that an inferior product may has a long-term advantage). Switching-costs are always dynamic and volatile.

- Patents, mentioned above, are generally temporary

- low-cost provider; if the gap is not substantial (almost always due to a structural difference in the business model), or the market is not sufficiently large, or if the market is not stable or necessary

- Brands; either 1) pricing power, or 2) sustained price premium must exist for the brand to be any different than the "brand" of a private label. The pricing premium should, by rule, not be due to the increase in marketing & advertising.

 

Other [Good] Moats:

- Business models that try to capture the area above the supply curve (see below)

    * EA has added the "Ultimate Team" mode which allows players to spend USD to buy virtual packs to improve their teams faster than other players. This allows some players to buy the game for $60 as normal while other players can spend upwards of $2,000 on a game. This new mode which drastically altered their revenue streams has allowed EA to capture as much $ as folks are willing to bear.

 

A lot of quality businesses are due to incentives. If everyone is incentivized to use the same product/service and the reason they need to use this product/service is because of something sustainable and incredibly popular/fun/necessary, then you have the recipe for a great business. I have always found illegal drug markets to be incredibly interesting because of their profitability stereotype. A general rule of thumb, you want your business to be more profitable than selling drugs (high-margin/high-turnover businesses cough up more cash than the plague).

 

Articles about moats:

http://www.morningstar.com/InvGlossary/economic_moat.aspx

http://corporate.morningstar.com/US/documents/Indexes/What-Makes-A-Moat.pdf

http://news.morningstar.com/articlenet/article.aspx?id=91441

http://www.suredividend.com/17-of-warren-buffetts-best-quotes-analyzed/

http://www.cognios.com/documents/fidelity-201308.pdf

http://online.barrons.com/articles/small-cap-stocks-beat-the-market-nyu-study-finds-1421960412

* There are much better articles, these are basic info.

 

The excel file show the results of compounding over time. It just shows compounding is not proportional (even though we estimate it is when discussing current yields between a quality company [which may partially compound] and an undervalued average business). If you can find quality businesses that compound even 50% of their annual earnings, consistently, you have something great (almost regardless of multiple - TDG is compelling at 20x - 30x)!

 

Why_good_stocks_matter_more_than_price_paid.xlsx

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There are very very few true practitioners out there and everyone has a different definiton of quality or moat (most misused and over used investing phrase/concept) so finding "proof" of the concept is difficult. KC has a decent list. I would imagine quality companies have gone out of style during the bull market. For every 100%-200% increase in P&G or PEP there was a 500% increase in CAT and 1,000% in Manitowoc. There is no guarantee that the market will continue to undervalue quality or that the market won't undervalue another stable stream of earnings to a greater degree than quality stocks.

 

#1 Don't Lose Money #2 Make 15% on capital (I don't forget rules so I have a more relevant #2 haha). Quality stocks just make sense from this perspective.

 

The leading academic is at U of R (Robert Levy-Marx) and he has a bunch of papers trying to classify quality companies to further narrow his conclusions that they outperform consistently (basically, he argues the market ignores quality, which I fully subscribe to).

http://business.uic.edu/docs/default-source/finance-dept.---papers/the-quality-dimension-of-value-investing.pdf?sfvrsn=2

http://rnm.simon.rochester.edu/research/OSoV.pdf

https://scholar.google.com/scholar?es_sm=93&biw=1366&bih=643&bav=on.2,or.&bvm=bv.96952980,d.cWw&um=1&ie=UTF-8&lr&q=related:OjauV1z4ktZbTM:scholar.google.com/

 

 

My own opinions on quality investing (since it is my preferred strategy at the moment):

The major problem is how subjective defining "quality" is. If you go with pure quantitative research you are going to end up biting on a lot of head-fakes (no different than buying based on stock screener results). Either way, I'm convinced it is by far the most consistent and conservative method (see excel files). I think the best practitioners are stingy with their quality stamps of approval.

 

I keep a list of quality companies and maintain it frequently. It's currently around 50-60 names, about 50% are large/mega caps and >25% are small/micro caps (I've found that moats tend to be niche businesses or are wildly successful - general outcome is See's Candy or GEICO/Coca-Cola). While researching the company (not numbers, the company) I like to identify:

1) Who is the customer (narrow part of the general, how do they make their money?)

2) How large is the potential market

3) What is their market share (if it is low, why?)

4) Is this a local/regional/national/global market (not necessarily where they sell currently but where they could potentially sell)

5) Has there been any new competition

6) Why do they have an advantage (patent/law/certification/better value/low costs/ect)

7) How much would it cost me to overtake them

 

I think #7 is ultimately where you find moats. A company with a moat may or may not be excessively profitable at the moment, and probably won't be excessively profitable if it's cheap. If the company truly has a moat then margins/revenue will eventually revert to mean (think MCO/MHFI in 2008-2009 when companies were issuing less debt simultaneously while the MBS market halted - earnings power was significantly greater than earnings at that point).

 

Quality investing is an art (one I'm trying to get better at, quickly). Any attempt to make it a science will lead you to failure. I think a lot of mathematical methods can be incorporated (such as classification, basic criteria, research rigor) to improve research productivity and standardize your target investments, but ultimately it is an art. My best investments were obvious 10-15 minutes into the research [of the company] and everything after that was confirmation of my suspicions.

 

The "best" moats have near-100% market share without anti-trust suits. Everyone should be in near-unanimous agreement that this is the best solution to a problem (preferably one that leads to a standardized solution). WD-40, KO, FICO, NKE, ADBE, SLP, ELDO are some examples that come to me immediately as having near 100% market share in their various niches (whether locally, nationally, or internationally). Growth comes from pricing power which can be extremely predictable and almost always surprise to the upside (McDonald's goes from $1 menu to $2 menu).

 

What is a "quality" company? It's easier to start with examples:

Government approved monopolies are a great place to start:

* You need to research why the law exists?; does it still provide the value intended?; what is the outlook or environment like?

    - MCO/MHFI

    - MLB/NFL/NBA/NHL

    - Companies benefiting from the Jones Act

    - SpaceX: They are only going to let certain folks launch rockets

    - SIRI: Again, there can only be so many satellites and it's not the easiest approval process [unlike managing money :)]

    - Every company that relies on patents (whether normal FDA drug approval process, orphan drugs, device makers, non-healthcare companies, ect)

        * These are temporary and they generally lose excellent ROIC within 1-2 years post-expiration

    - MON: Sometimes change happens so fast (and predictably) that patent expiration is less of a worry. Monsanto has biological effects on their side as their seeds tend to change the composition of the soil such that you can only grow MON seeds the next year (quality investing is littered with companies of questionable ethics)

    -- However, gambling is an example of how quickly govn't approved monopolies can go bad. As Munger often says, follow the incentives. Every state watched as Nevada funded their entire budget from a single street in Las Vegas and envy leached all the profits from gambling everywhere. Stability is more important the depth or breadth when considering an economic advantage.

 

Semi-government monopolies or Problems that required a single solution (all companies solve a problem; is the problem meaningful and is the solution elegant?):

* This is the good stuff! Find companies where their product/service is geared towards something 1) necessary or consistently in-demand. Often, where the problem of (1) leads to a shared or non-unique solution that 2) significantly improves the experience of (1) [huge value-added product/services - e.g. KO improves drinking, P&G improves hygiene,

    - FICO: Creates the "standard" formula for credit checks (and to some degree, background checks)

        * The average person is not comfortable thinking in ranges. A single number is necessary in a lot of parts of life that are truly ranges.    Generally, this results in a strong business or monopoly for the last company standing in these situations.

    - EFX/TransUnion/Experion - Everyone needs background/credit reports

    - AXP: creating a payment network is difficult (chicken and egg problem). AXP created one tailored for the upper-class by adding discounted premium services

    - CLB: Extracting oil is difficult. CLB has the best solution that had enough breadth to turn a fragmented software market into a monopoly

    - MA/V/PYPL

    - OTCM

    - SLP

    - TDG: This is more semi govn't approval. The certification process is so expensive and long that most parts are minimally profitable (most aircraft designs are not as popular as the Boeing 747, for instance). TDG identified the best value aircraft designs and received sole-approval for the majority of the parts for those designs. This gave them access long periods of monopolistic markets. This spills into management capability and other aspects.

 

Network Effects (They built it, people came, and now every new customer has no choice but to join the network):

* To claim a company has network effects, it should already have at least a majority market share (>50%) as the pricing power before market domination is minimal or they are price taker

    - Ebay [Marketplace]: The original network effects poster-girl.

    - V/MA/PYPL

    - CME

    - CHRW: Gaining market share every year as the market goes from a word-of-mouth business to CHRW becoming the ebay/craigslist of trucking. Exception to 50% market share rule as they dominate in market share (>4x closest competitor?)

    - FB

    - TWTR/SnapChat/YouTube

 

Other types of moats that are possible. Just because Morningstar lists some ways for moats to form does not mean that these are exclusively the only ways. There is also no implication that a moat exists because a business has a similar business model. Every company & market is unique [mathematical definition]). Some less profitable ones include:

- High-Switching Costs (I think this is a pretty poor moat-type as it implies that there is a possibility that an inferior product may has a long-term advantage). Switching-costs are always dynamic and volatile.

- Patents, mentioned above, are generally temporary

- low-cost provider; if the gap is not substantial (almost always due to a structural difference in the business model), or the market is not sufficiently large, or if the market is not stable or necessary

- Brands; either 1) pricing power, or 2) sustained price premium must exist for the brand to be any different than the "brand" of a private label. The pricing premium should, by rule, not be due to the increase in marketing & advertising.

 

Other [Good] Moats:

- Business models that try to capture the area above the supply curve (see below)

    * EA has added the "Ultimate Team" mode which allows players to spend USD to buy virtual packs to improve their teams faster than other players. This allows some players to buy the game for $60 as normal while other players can spend upwards of $2,000 on a game. This new mode which drastically altered their revenue streams has allowed EA to capture as much $ as folks are willing to bear.

 

A lot of quality businesses are due to incentives. If everyone is incentivized to use the same product/service and the reason they need to use this product/service is because of something sustainable and incredibly popular/fun/necessary, then you have the recipe for a great business. I have always found illegal drug markets to be incredibly interesting because of their profitability stereotype. A general rule of thumb, you want your business to be more profitable than selling drugs (high-margin/high-turnover businesses cough up more cash than the plague).

 

Articles about moats:

http://www.morningstar.com/InvGlossary/economic_moat.aspx

http://corporate.morningstar.com/US/documents/Indexes/What-Makes-A-Moat.pdf

http://news.morningstar.com/articlenet/article.aspx?id=91441

http://www.suredividend.com/17-of-warren-buffetts-best-quotes-analyzed/

http://www.cognios.com/documents/fidelity-201308.pdf

http://online.barrons.com/articles/small-cap-stocks-beat-the-market-nyu-study-finds-1421960412

* There are much better articles, these are basic info.

 

The excel file show the results of compounding over time. It just shows compounding is not proportional (even though we estimate it is when discussing current yields between a quality company [which may partially compound] and an undervalued average business). If you can find quality businesses that compound even 50% of their annual earnings, consistently, you have something great (almost regardless of multiple - TDG is compelling at 20x - 30x)!

 

How about the low cost operators? It's one hell of a moat too.

 

BeerBaron

 

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Great thread Packer.

 

I think some of the Tiger cubs' performances may be what contributes quality GARPs.

 

My investment partner's former boss compounded at 20% alpha for 14 years and is now retired. Long-short strat. It's very effective, but very very tedious process. It involves months of talking to competitors and former execs to figure out what company has what advantage.

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Guest Schwab711

I mentioned low-cost operators. I actually think it's a pretty flimsy moat unless the business has a lower cost due to a structural difference in the business model that is not replicable (and some other "ifs"). Kellog's is the lowest cost producer of cereal and it's a pretty terrible investment (and has been).

 

In general, I think there are a lot of great companies with excellent returns that do not have a moat. There is just a temporary gap in supply or something else. Just having excellent returns does not make a moat in my mind, I think of a moat as high stability and growth in future earnings.

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