I’m not expecting this to be hugely lengthy and I am living on the edge by having no plan or anything, but hopefully I can stitch something together that is just about readable and might even make a smidgeon of sense.
Whilst creating that ‘Educational’ Blog about Consistency & Volatility the other day (scroll down on the Educational Blogs page and you should find it very quickly), I realised that after 7 years or something of bandying around the term ‘Quality Stocks’ I had never actually made any attempt to try to define that, and this Blog is obviously an attempt to fill the gap (is ‘bandying’ an actual word? The Spellcheck seems happy with it anyway……perhaps it is something to do with Groupies……)
Related to this subject, some time ago I produced a load of Blogs which each contained Checklists which Readers can use themselves or adapt or whatever they wish (chuck them in the WheelieBin if you like !!), and you can find those via this one which has links in it to the others:
Right, moving on, as I see it in a very simplistic way, a Quality Stock is from a proper Business that has been operating for many years and which has a Track Record of growing Revenues, Profits, Cash Generation, Dividends; and where the potential future suggests growth can continue and the Management have demonstrated their capability over many years and there is a realistic and attractive Strategy. It must have a strong Balance Sheet with little or no Debt and a record of organic growth along with well executed ‘bolt-on’ acquisitions that have shown Strategic sense and price discipline in not over-paying.
Embellishing this and adding to it, I would look for the following Attributes (these Bullets might help Readers draw up a Checklist). Please bear in mind that I have not specifically addressed key matters like Valuation and the Charts Set-up here, but my focus is on the actual Business itself and to an extent those other ‘Investment’ elements come later. Not all these Attributes will be relevant to every Company and there may be some where it does not quite meet the standard you would like, which is where your Risk Management and Discretion come into play:
I hope that has covered pretty much everything although I am sure there are bits I have missed out, but I want to get it finished and my brain hurts now !! As it stands, it should give you plenty of pointers in terms of what things matter with a Quality Business and of course all the usual disciplines of assessing Valuation and appropriate Position Sizing for your Risk Tolerance must apply. It is probably a good idea to check out the Chart as well and see if you are buying a Stock that is moving up or something that is actually very out of favour and continually falling.
However, putting it simply, if you stick to buying Quality Stocks then you massively weight the luck in your favour and you are much more likely to be successful than if you just buy any old trash willy, nilly.
This one from my mate Justin covers the Balance Sheet and P&L stuff very well (there is a link at the start to Part 1):
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