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What do you take "Quality" companies to mean?
Aminatidi
Posted: 06 May 2018 08:00:22(UTC)
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I've set my current plan around holding funds that invest in "quality", so nothing too glamorous, probably the usual suspects of Lindsell Train Global, Fundsmith, and Buffettology.

I recently offloaded (at an overall profit) the things I purchased when I started a few months ago and dove into "diversification" and "defence", so RCP, SMT, BGS and EWI are now toast.

On a thread around SMT I mentioned I was selling to pursue a "quality" approach and someone asked, rightfully, what do you call quality?

Best I could come up with was "Unilever v Tesla or Diageo v Alibaba" and "Established v "who knows how they'll do?""

Not exactly measurable though :) What do you take "quality" to mean?

Oh, and fund suggestions welcome as it quality as I understand it seems a small universe.
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Dian on 07/05/2018(UTC)
Keith Cobby
Posted: 06 May 2018 08:40:58(UTC)
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I would say that RCP, SMT, BGS, EWI are top quality.
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Tony Peterson
Posted: 06 May 2018 09:27:45(UTC)
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The companies that supply me with safe water, with food and drink, with clothing, with electricity and heating energy, with telecommunications, with medicine, with holidays, all of extremely high quality, also (as a shareholder) each pay me in dividends far more than I need to pay for my consumption of their excellent products.

I regard them all as "quality" companies.

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Mr Helpful
Posted: 06 May 2018 10:27:13(UTC)
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At a company level :-

+ Sustainable revenue growth
+ Sustainable pre-tax growth
+ Sustainable earnings growth
+ Supporting cash flow
+ Sustainable dividend growth (adequate dividend cover)
+ Reasonable continuing ROCE
? Preferably low debt (and certainly not serious growing debt)
- No inclination to accounting shenanigans

Other measures such as PS, PCF, PB, PE, PEG, DY, etc; are share price sensitive and will thus vary over cycles, indicating favourable entry and exit points.
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Aminatidi on 06/05/2018(UTC), Dian on 07/05/2018(UTC), gillyann on 07/05/2018(UTC), Law Man on 09/05/2018(UTC), Inderpal Singh Khalsa on 09/05/2018(UTC)
King Lodos
Posted: 06 May 2018 14:10:38(UTC)
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Yeah .. predictability (of earnings, profitability, growth .. low risk of financial trouble).

The key to doing well with quality is NOT diversification.

It may be hard to find a single quality company at an attractive price .. But when you do, these should be very safe, stable investments .. So you shouldn't need 10 similar stocks to manage the risk of 5 of them going bankrupt, or 3 similar funds to avoid dips (which you should be buying) .. Like any style of investing, you need to know exactly what you're doing, and just do that
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Aminatidi on 06/05/2018(UTC), Dian on 07/05/2018(UTC), Guest on 09/05/2018(UTC)
Aminatidi
Posted: 07 May 2018 07:28:07(UTC)
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Thank you, some interesting and slightly different perspectives.

Tony & KL, as much as I get you each have completely different ways of going about things I'm not sure if you're in agreement or not?
Big boy
Posted: 07 May 2018 08:49:42(UTC)
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Once the vast majority of investors buy a Company it becomes a "Quality" stock. It's like a "branded item" we are happy to pay a premium for as against the same product with the name "non quality". How many Investors rushed into SMT when they fell 50%. (We must buy long term records) Can anybody tell me what Premium they stood on then.

"Masters of the Universe".........Over the decade I have seen investors build them up and knock them down so many times..........
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Aminatidi on 07/05/2018(UTC), Dian on 10/05/2018(UTC)
Dian
Posted: 07 May 2018 09:22:57(UTC)
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Tony Peterson;61817 wrote:
The companies that supply me with safe water, with food and drink, with clothing, with electricity and heating energy, with telecommunications, with medicine, with holidays, all of extremely high quality, also (as a shareholder) each pay me in dividends far more than I need to pay for my consumption of their excellent products.

I regard them all as "quality" companies.



Don't forget that those types of companies have long term business as well.
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Aminatidi on 07/05/2018(UTC)
Tom Bards
Posted: 07 May 2018 15:03:34(UTC)
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What exactly makes the holdings of Buffettology 'quality' as you say?

Very little of the holdings are what you would call established in the same vein as Lindsell Train and Fundsmith and they are certainty no more established than the holdings in the funds you sold.

Do you really believe, for example, that AB Dynamics or Bioventix are more established than Alibaba and Amazon?

Buffettology basically looks like a high growth fund to me filled with quite a number of small caps.
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Aminatidi on 07/05/2018(UTC), mcminvest on 11/05/2018(UTC)
Aminatidi
Posted: 07 May 2018 15:30:23(UTC)
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Tom Bards;61863 wrote:
What exactly makes the holdings of Buffettology 'quality' as you say?

Very little of the holdings are what you would call established in the same vein as Lindsell Train and Fundsmith and they are certainty no more established than the holdings in the funds you sold.

Do you really believe, for example, that AB Dynamics or Bioventix are more established than Alibaba and Amazon?

Buffettology basically looks like a high growth fund to me filled with quite a number of small caps.


Whether they're "quality" is why I asked the question, as it seems different people have different definitions.

I've been doing a lot of reading and listening and I'm part way through Keith Ashworth-Lord's book.

There's a PDF on the website that explains his investment principles far better than I could ever try to paraphrase them.

https://cache.cyclerack....ginal.pdf?filename=true

Right now it makes a bit more sense to me than hoping the Tesla's of the world succeed.

Of course I'm sure people with SMT will do very well too but even in the short time I held it I was a bit put off by the volatility which is just a personal thing.
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mcminvest on 11/05/2018(UTC)
Tom Bards
Posted: 07 May 2018 16:09:11(UTC)
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Aminatidi;61864 wrote:
Tom Bards;61863 wrote:
What exactly makes the holdings of Buffettology 'quality' as you say?

Very little of the holdings are what you would call established in the same vein as Lindsell Train and Fundsmith and they are certainty no more established than the holdings in the funds you sold.

Do you really believe, for example, that AB Dynamics or Bioventix are more established than Alibaba and Amazon?

Buffettology basically looks like a high growth fund to me filled with quite a number of small caps.


Whether they're "quality" is why I asked the question, as it seems different people have different definitions.

I've been doing a lot of reading and listening and I'm part way through Keith Ashworth-Lord's book.

There's a PDF on the website that explains his investment principles far better than I could ever try to paraphrase them.

https://cache.cyclerack....ginal.pdf?filename=true

Right now it makes a bit more sense to me than hoping the Tesla's of the world succeed.

Of course I'm sure people with SMT will do very well too but even in the short time I held it I was a bit put off by the volatility which is just a personal thing.


Your comment above is interesting in my opinion, many of the companies in Buffettology are exactly that.

It sounds like you just have an issue with volatility which is, of course, fairly common and normal. I just question the somewhat simplistic way you are describing funds. SMT and the like are not just hoping, many of the companies held have already succeeded to the point that they are now some of the largest companies on earth and the leaders in their sectors.

There is, of course, no question that the SMT holdings are more volatile and more growth orientated but don't make the mistake in thinking that these are not good businesses or are somehow of worse 'quality' than the ones in the funds you mentioned because of that.




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Aminatidi on 15/05/2018(UTC)
Harry Trout
Posted: 07 May 2018 16:32:38(UTC)
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I am looking at Buffettology to replace a slug of my River & Mercantile UK Smaller since Phillip Rodrigs left. R&M has built over many years to be my second biggest holding and I am a bit spooked by the sudden change in manager.

Prompted by this thread I created a portfolio in Stockopedia for Buffettology’s Top 10. Stockopedia numerate quality, value and momentum for all stocks.

The top 10 in Buffettology is very heavily weighted towards quality and momentum and scores low on value.

For me this is a tick in the box as I like stocks with high quality and momentum scores and so I intend to invest and give it a whirl. 3 year performance is also well ahead of the R&M fund it will be partially replacing. There is no overlap between the two funds which is helpful too.

As everyone has a different view on “Quality” I though it might be interesting to chuck some numeration into the mix in this thread.
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mcminvest on 11/05/2018(UTC), Aminatidi on 15/05/2018(UTC)
Aminatidi
Posted: 08 May 2018 11:41:04(UTC)
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@Tom I'm going to guess that a business analyst put in front of Tesla's books vs. one in front of Domino's Pizza would see different things?

I'm not a business analyst and I may yet dip back into SMT :)

@Harry that's interesting especially you mentioning the fund manager as whilst it's very early days I seem to find myself searching for as many videos and articles as possible about the people who run the funds as I do the fund holdings.

I'm a little of the way through Keith Ashworth-Lord's book and whilst I don't think a career in finance awaits me I get the concepts so far around creating value and how you can use some neat accounting tricks etc.
Law Man
Posted: 09 May 2018 17:33:35(UTC)
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"stable, growing, cashflow generative business with high returns": ROCE, sales growth, margins etc

"Direction in which the company's fundamentals headed": Poiotroski F Score covering efficiency, borrowings, and profitability.

"Is there a risk to your capital investing in this company": risk of insolvency

The above are definitions used by a proprietary stock screener.
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Tim D on 09/05/2018(UTC), Dian on 10/05/2018(UTC), Aminatidi on 15/05/2018(UTC), Alan Selwood on 22/05/2018(UTC)
Alan Selwood
Posted: 09 May 2018 21:59:28(UTC)
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The other very important factors are whether the management of the company is on your side or not ('skin in the game') and trustworthy.

If they see themselves as responsible stewards rather than people who want to extract maximum value for themselves, this plus their skill, industry and foresight will get you into a very good investment usually.

Rugby Cement was in this category (when it still existed as a separate entity), and I suspect that the same applied to Morrisons under Ken Morrison. Also the original people running Helical Bar. Obviously many others, but there are a lot of self-seeking sharks about, and it pays to be able to sift 'sheep' from 'goats'.
Keith Ashworth-Lord treats this as one of his important selection factors.
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Dian
Posted: 10 May 2018 07:01:00(UTC)
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In addition to long term businesses, quality companies will have strong balance sheets. When an economic downturn hits, companies with lots of cash, manageable debt, and strong free cash flows can be used to buy back companies shares, acquire rivals at low valuations and take long term market share by facing competition strongly and successfully. Moreover, cash rich companies can generate short term income using their cash and cash equivalents. They don't have to pay interest as well. In an extended market, attractive stocks with strong balance sheets will stand out from the rest.

Quote:
A company with a strong balance sheet is "antifragile." The word -- coined by best-selling author and trader Nassim Taleb.
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Aminatidi on 15/05/2018(UTC)
mark spurrier
Posted: 15 May 2018 06:00:02(UTC)
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Quality - may be in the eye of the beholder :)

Quality for me means

A sustainably high ROCE and Free Cash Flow Yield
A business model I understand and the management stick to
M&A activity that makes obvious sense strategically given the business the company is in
Decent earnings growth with a string cash conversion rate - beware companies that make high profits but they are all on papaer
has pricing power but, isn't being silly with it - shaving products is a case in point.....If you want to charge a fortune for razor blades like P&G you will get other players in the market
is not likely to face disruption from new entrants with a technological advantage
for me....... not tobacco gambling, door step lending, etc as they attract governments and, in my view, depend on addiction and misery
Work in a reasonably regulated geography..... the laws in somewhereistan may not offer protection from your company being appropriated by a "consortium of local businessmen" at a bargain price
Are likely to have accounts that are generally factual
Operate in a geography that has extradition treaties


A long list. I would avoid gambling companies based in Israel for example. Israel won't extradite Israelis and it is the world centre for the binary options trading that result in naive PIs losing their socks I might buy IG but wouldn't touch Plus500


Some people like family ownership, heavy involvement and an aligned management. I can't make my mind up about this. Yes, manager and shaeholder alignment is good but I have been personally involved in a company that has been killing itself in the pursuit of ever rising profits
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Tom Bards
Posted: 15 May 2018 06:35:37(UTC)
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Aminatidi;61907 wrote:
@Tom I'm going to guess that a business analyst put in front of Tesla's books vs. one in front of Domino's Pizza would see different things?

I'm not a business analyst and I may yet dip back into SMT :)

@Harry that's interesting especially you mentioning the fund manager as whilst it's very early days I seem to find myself searching for as many videos and articles as possible about the people who run the funds as I do the fund holdings.

I'm a little of the way through Keith Ashworth-Lord's book and whilst I don't think a career in finance awaits me I get the concepts so far around creating value and how you can use some neat accounting tricks etc.


Who said anything about Tesla vs Domino's Pizza? Nice strawman though.

As I said earlier, your viewpoint is somewhat warped seeing as the only the example you have been able to give is Tesla. I have already stated elsewhere my issues with Tesla but you act like SMT and its like are 100% Tesla which is frankly a ridiculous stance to have.

Do you really believe Bioventix and Games Workshop are 'quality' while Amazon, Illumina, Ferrari and Kering are not?

And for the record LT Global makes up a much larger percentage of my portfolio than SMT does, it is important, however, not to be narrow minded about these things.







Tim D
Posted: 20 May 2018 15:38:26(UTC)
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Aminatidi;61815 wrote:
Best I could come up with was "Unilever v Tesla or Diageo v Alibaba" and "Established v "who knows how they'll do?""

Not exactly measurable though :) What do you take "quality" to mean?


But "quality factor" ETFs *do* need to come up with an objective way to measure exactly this. Not sure if there are alternative approaches, but I put some of this year's ISA money into IWFQ... the methodology for the index that tracks (described here) is based on tilting towards stocks with superior (using z-scores vs. index averages) Return on Equity, Debt to Equity and Earnings Variability (over 5 years) numbers. That leads to IWFQ having top-10 holdings Microsoft, Apple, Johnson&Johnson, AIA, Exxon, Roche, Mastercard, Visa, Altria, 3M. Unilever and Diageo are in there in 29th & 30th place and with 0.85%/0.84% holdings (there's no Tesla!) c.f 0.17%/0.22%/0.09% in the parent MSCI World index (which the quality factor modulates). Unfortunately it does come with a 0.5% OCF, which is more than you'd expect to pay for a "vanilla" global index fund/ETF.
King Lodos
Posted: 20 May 2018 17:21:54(UTC)
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There are problems with ETF construction.

In academia, the factor is often defined as Value minus Growth, or Quality minus Junk .. So you're long Quality and short the opposite of Quality .. And if you were looking at Quality in isolation, you might set tougher parameters or weighting rules, to really isolate the effect.

When you turn this into a vanilla, cap-weighted ETF, there may be very little of the 'factor' captured .. This has certainly been true of Value ETFs .. Another example is that Apple is the top holding across a whole range of factor ETFs, from Value to Growth to Quality – and a lot of them have almost the same top 10 holdings (as does the vanilla index).


So you could say there are a lot of closet market trackers in the ETF world – perhaps for the same reasons there are in the active world (the average is a safer thing to aim for).

The problem with metrics like Return on Capital is, in isolation, they're not good predictors .. The higher ROC companies usually have poor long-term returns, because they're in sectors where there are huge profits, which everyone's going to move in on .. That's why you have to have a wide moat too – it actually becomes more important, and companies that fit the bill become much rarer, and then don't really fit the ETF structure.
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Tim D on 20/05/2018(UTC)
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