The Quality Series · part 13 of 13
Over the previous twelve parts I have set down, one piece at a time, how I evaluate whether a business meets my threshold of quality. Below is the general checklist I put to every company before it goes anywhere near a portfolio. It is not a list of the earlier parts. But if a business gives convincing answers to all eleven questions, every characteristic of quality this series has described will have been covered along the way.
- Is the business easy to understand, and is it likely to still be around in ten years? (If I cannot understand a business well enough to judge whether it will still be here in ten or fifteen years, it stays in the too-hard pile.)
- Does it have a strong and durable moat? Can it raise its prices and still grow, or at the very least hold, its market share?
- Is it a leader in its niche or its industry?
- Does it earn high returns on capital, and are those returns likely to be sustained?
- Do the numbers demonstrate sustained operating leverage?
- Is it capital efficient? (The cornerstone of how I select businesses.)
- Does it produce and grow free cash flow consistently?
- Is the balance sheet strong?
- Are management’s interests aligned with shareholders’, and does it allocate capital well?
- Is there a strong likelihood of continued growth?
- Am I overpaying?
No single answer on the above list decides whether a business makes the cut. It’s an overall judgement.
One last thing I would like to highlight: none of the companies mentioned in any part of this series is a recommendation to buy or sell a stock. Each one, and every figure from its financials, was there only to illustrate the concept being discussed in that part.
The full version, with a short note on each question, is here for anyone who wants to keep it.
That brings the series to a close. Thank you for coming along on this journey with me. Many of you have written in with comments and questions along the way, and I am grateful for every one of them. From time to time I will come back to the questions and points you have raised.
The letter itself carries on. If you have a comment or a question, or would like to explore working together, please feel free to write to me on imran@marketmeditation.com. And if someone you know would find this interesting, please share it with them.
The series so far
- Part 1: The whole idea, in one line
- Part 2: Same five years, very different businesses
- Part 3: From great business to great investment
- Part 4: Where stock returns actually come from
- Part 5: The secret sauce
- Part 6: Why return on capital decides it
- Part 7: A moat is the power to raise prices
- Part 8: Three engines, and the people driving them
- Part 9: What I won't own
- Part 10: Am I overpaying?
- Part 11: A temporary dislocation, or a permanent impairment?
- Part 12: When I sell, and the two clocks
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This is my personal investing journal, written for information only. It is not investment advice or a recommendation to buy or sell any security, and it does not take account of your circumstances. I may own shares in companies I write about. Past returns are no guide to future returns.
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