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Quality Investing: Owning the Best Companies for the Long Term
The concept of quality is familiar. People make judgments about it every day. Yet articulating a clear definition of quality is challenging.
The best companies often appear to be characterized by an ineffable something, much like that of people who seem graced by a lucky gene. Think about those of your peers who seem a lot like you but somehow always catch a break. They are not obviously smarter, smoother, richer, or better-looking than you, yet they are admitted to their university of choice, get their dream job, and earn considerable wealth. Try to discern what they have that you don't, and you are stumped. Chalk it up to fate or plain dumb luck.
Businesses can be similar. For reasons that are not always evident, some end up doing the right things with better results than average. They may not appear to be savvier acquirers, more adept marketers, or bolder pioneers, yet they integrate new businesses better, launch products more successfully, and open new markets with fewer mishaps. Perhaps through some combination of vision, scale, or business philosophy, these companies uncannily come out ahead.
In our view, three characteristics indicate quality. These are strong, predictable cash generation; sustainably high returns on capital; and attractive growth opportunities.
The best companies often appear to be characterized by an ineffable something, much like that of people who seem graced by a lucky gene. Think about those of your peers who seem a lot like you but somehow always catch a break. They are not obviously smarter, smoother, richer, or better-looking than you, yet they are admitted to their university of choice, get their dream job, and earn considerable wealth. Try to discern what they have that you don't, and you are stumped. Chalk it up to fate or plain dumb luck.
Businesses can be similar. For reasons that are not always evident, some end up doing the right things with better results than average. They may not appear to be savvier acquirers, more adept marketers, or bolder pioneers, yet they integrate new businesses better, launch products more successfully, and open new markets with fewer mishaps. Perhaps through some combination of vision, scale, or business philosophy, these companies uncannily come out ahead.
In our view, three characteristics indicate quality. These are strong, predictable cash generation; sustainably high returns on capital; and attractive growth opportunities.
"Investing is a continuous process of learning, and it will be a rare investor who does not glean substantive lessons from the notable AKO story of quality investing."
- Stephen Blyth, President and CEO, Harvard Management Company, Professor of the Practice of Statistics, Harvard University
224 pages, Hardcover
First published January 5, 2016
193 people are currently reading
2900 people want to read
About the author
Lawrence A. Cunningham
43 books142 followersLawrence Cunningham, who goes by Larry, has published many books, including:
Berkshire Beyond Buffett: The Enduring Value of Values
The Essays of Warren Buffett: Lessons for Corporate America
Contracts in the Real World: Stories of Popular Contracts and Why They Matter
The AIG Story
He loves teaching (a prawf at GW), windsurfing, reading, and spending time with his wife and two daughters, preferably at the beach.
On Amazon, Cunningham has been ranked one of the top 100 authors in the category of business and investing.
Berkshire Beyond Buffett: The Enduring Value of Values
The Essays of Warren Buffett: Lessons for Corporate America
Contracts in the Real World: Stories of Popular Contracts and Why They Matter
The AIG Story
He loves teaching (a prawf at GW), windsurfing, reading, and spending time with his wife and two daughters, preferably at the beach.
On Amazon, Cunningham has been ranked one of the top 100 authors in the category of business and investing.
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Displaying 1 - 30 of 70 reviews
January 17, 2021
I picked this up because Dan Loeb recommended this book in one of Third Point's recent letters. There are few good investing books out there, and this is one of them. The book is a thorough checklist of the ingredients of investing in quality businesses, and provides a litany of examples to illustrate the various checklist items. The framework is very similar to that used by Berkshire Hathaway (in short: companies with predictable recurring revenues that generate high cash-flow returns on invested capital with durable competitive moats which allow a company to consistently compound intrinsic value over long periods of time). It also walks through some of the frameworks that Buffett and Munger have espoused over time, such as "Toll Roads" (companies that sell a product to a customer which comprises an immaterial portion of the customer's cost structure but is critical to its operations) and "Friendly middlemen" (companies that sell products through expert-salesmen such as opticians and plumbers that incentivize them to generate the highest margin on the company's own products). Many of the principles discussed in the book will doubtless be familiar to students of investing, but it's nonetheless a good read due to its extensiveness and case studies.
January 9, 2022
An excellent read that has the be one of the most comprehensive discussions of how to think about the quality of a business, it’s industry, and management. It is an easy but dense read that presents many, many investment frameworks. My notes below…
Definition of quality: The combination of (1) strong and predictable cash generation; (2) sustainably high ROIC and; (3) attractive growth opportunities. The critical link between growth and value creation is IROIC. Industry structure must be considered because even the best run companies in an over supplied, price deflationary industry are unlikely to meet the quality hurdle. Qualitative characteristics are often more important than quantitative ones.
CAPITAL ALLOCATION
A&P: can drive short term sales growth but needs to be sustained long term to drive long term value. Should be classified as an investment rather than expense.
M&A: generally be wary of acquisition led growth but note potential exceptions to the rule (1) consolidation of fragmented industries, (2) buying quality but under penetrated business who could benefit from increased distribution under a larger owner, (3) ability to source deals from privately held companies who aren’t run efficiently, (4) seasoned management team. Red flags include (1) rationale such as diversification, scale, or rapidity, (2) incentive comp linked to absolute size such as revenue or EBITDA growth, (3) multiple larger acquisition in close succession as it may signal a deterioration in the core business.
Measuring Returns: Avoid ROE (net inc / BV) because both metrics can be manipulated by management and it does not consider leverage risks. CROCI uses post tax cash earning over total capital base. Adjust out amortization. Short term incremental margins aren’t necessarily a good guide for future returns because many investment take years to pay off. Gross margins can be a shortcut to understand the competitive position of the business. Consistently high gross and operating is a strong signal of quality.
SOURCES OF GROWTH
Market share gains: Reliable source of growth as they are independent of the economic cycle and largely within managements control. Identify the share donor and look for consistency in the share gains.
Geographic expansion: Success can be tough. A company with unique domestic advantages may struggle to replicate success abroad. Examples: unique distribution agreement, local scale advantages, and regulatory capture. Premium brands transition to new markets relatively easily.
Pricing, mix, and volume: Pricing is the most valuable as it is 100% incremental margin. Mix (ie premiumization) is second as it comes with little incremental costs. Volume growth is least valuable as it comes at the same unit cost (and GM) unless it is an asset light business with fixed costs (ie software or pharma).
Cyclical end market: Risky bet. If investing in cyclicals look for companies that can grow thru the cycle. Market share gains in downturns are a sign of strength.
Structural end market: Look for real sustainable trends. People thought US golf and Chinese cognac sales were structurally growing but they were just long cycles. Trends like disease prevention, urbanization, and aging populations are more likely to prove sources of durable structural growth.
Durability: Assuming high earnings growth will continue is dangerous. ROIC has proved more consistent and should be used as a more reliable indicator of future growth.
MANAGEMENT: Good companies doesn’t mean good management. Look for CEOs that speak candidly, rotate their NEOs to give them exposure to all areas of the business, invest counter cyclically, and maintain a conservative balance sheet. Be wary of those that like to be in the limelight.
INDUSTRY STRUCTURE
Mini monopolies: Better term would be mental monopoly. Customers could choose lots of cigarettes but there is only one option in mind for the smoker.
Partial monopolies: Local advantages. Aggregates businesses is an example. Switching costs are another. Razor blade model. The completion for the handle of fierce but much less so for the replacement blades.
Oligopolies: Number of competitors does not necessarily determine whether industry is attractive. Coke/Pepsi and Airbus/Boeing are duopolies but soft drinks is a much better industry because the buyer base is less concentrated, pricing is more transparent, and the amount spent is much less important.
Barriers to entry: Look for barriers to success too. Industry can be easy to enter but hard to succeed (restaurants). Finding an industry with big firms that still have family ownership is a good sign. Implies organic growth that didn’t require dilutive equity raises (confectionary industry).
Rationality mechanisms: Things to keep rivalry from getting out of hand. Payoff from aggression is deferred. Family owned competitors. Look for industries where there is a sustainable share donor to suppress the need to be aggressive. Competitors talking respectively of each other is a good sign. Be wary of industries with a player benchmarking themselves with a market share metric (KMX?).
Security by obscurity: Niches that are small with modest but consistent growth can be very attractive. They are unlikely to attract much capital as they aren’t as sexy as renewables, robotics, electric vehicles, etc.
CUSTOMER BENEFITS
Intangible: Products that convey image have traditionally had durable pricing power. Vanity is venerable. Products that go on the skin or in the mouth have been better FMCG categories than others over time.
Assurance: Customers will be less price sensitive if the cost of failure is high (smoke detectors, child safety equipment, helmets). This can translate in industrials as well. Mishandling oxygen might be catastrophic.
Convenience: Going to DG instead of WMT despite higher prices.
Customer types: Retail customers are more price sensitive in general but not with small purchases that convey intangible benefits above. Corporate customers are more price sensitive but it’s not all equal. They focus on larger ticket items so smaller purchases conveying a benefit are less scrutinized. Corporate risk aversion is a powerful trait to exploit.
COMPETITIVE ADVANTAGES
Technology: Only a handful of companies have maintained tech advantages over the long term. It is only sustainable if it delivers sustained benefits over long periods of time. Look for consistent R&D. When pace is measured it is typically complex improvements. Also takes competitors longer to catch up if investments were made over a long time. GOOG constantly refining algorithm or Experian regularly updating credit models to make product offering better for end user are good examples.
Network effects: System growth depends advantage. Main worry if it becomes too entrenched regulators will consider it a monopoly.
Distributions: Relationship driven. Service is a key part of the offering. No customer wants to buy an OEM product that can’t be serviced.
BUILDING BLOCKS OF QUALITY
Recurring revenue: Industries with recurring revenue generated from up front sales tend to be attractive. If service is mandated by regulation this increases attractiveness (jet engines, elevators). Look for products with long useful lives as shorter ones will be replaced rather than repaired. Service networks become more valuable as density increases. Upfront payments can be an added benefit given negative working capital.
INVESTMENT FRAMEWORKS
Friendly Middlemen: Selling a product thru an expert with aligned incentives with their client can be value add. Quality usually trumps price. For example a dentist recommending an implant or optometrist prescribing glasses. Not always good as sometime expert can become a costly gatekeeper (financial advisor with mutual funds = pay to play)
Tollroads: Selling a critical input that is a small part of overall cost. Examples: audit, testing, industrial gas, credit ratings. Chr Hansen does cultures. They are 1% of cost of producing the yogurt or cheese but tangibly impact taste and texture. Toll road companies tend to be in oligopoly industries as a sole supplier is too big of a cost.
Innovation dominance: Define the market correctly (diabetics not pharmaceuticals) then look for a concentration in industry R&D spend. Essilor spends 75% of the industry R&D for lens market
Forward integrators: Vertical integration, franchising, and licensing. Only works if brands are strong. Companies with their own operations built from scratch are more likely to succeed than those at mercy of third parties. Franchisors benefit from revenues being more stable than net income. Luxottica is best example of forward integrator. Vertical integration allows them to build brand awareness and dictate fashion trends which reduced inventory risk. The platform also provided superior acquisition synergies. Acquiring a brand gives it immediate access to a large retail network. Acquiring retailers gives them access to more premium product.
Market share gainers: Steady gains over long term are a good sign of quality.
Corporate Culture: Compounds on itself as companies tend to hire people that fit culture they already have. Good thing to look at is how bad news is distributed. Open and honest is healthy. Ask detailed questions about specific markets to see if they know the answer. Family owned companies tend to have particularly good cultures given focus on long term. Look for companies that share ownership with employees.
RISKS
Cyclicality: The longer the cycle the harder to analyze because it becomes easier to mistake cyclical growth for structural growth. Supply led cycles are less attractive than demand led ones as it becomes virtually impossible to predict prices. Look for businesses linked to customers operating rather capex budgets. There are “flow products” and have less cyclicality and less scrutiny due to their small and recurring nature. Low cost producers have reduced competitive advantages because their profitability depends entirely on the commodity price. Producing oil at $20 is great but it is hard to value the business unless you know the price will be $40 or $100.
Innovation/Disruption: Key question is “will this company’s products still be relevant in 10yrs”. Big innovations result in more victims than incumbents admit. It is tempting to blame the company or management for being disrupted but most companies are risk adverse, have slow decision making processes, and haven’t faced significant disruption. As such the main culprit is usually the industry itself.
AVOIDING MISTAKES: 80% of 1yr returns are determined by changes in multiples but nearly all of long terms returns are determined by earnings power.
This disconnect is a sustainable source of alpha. It is hard to overpay for a quality company with truly sustainable earning growth. Well researched qualitative judgments trump quantitive ones in the long term as the latter has just as many subjective inputs. Defending a challenge to a thesis with “Yes, but” is a red flag. Similarly assuming “it’s fully priced in is risky”. Overconfidence bias is especially relevant in scenarios where a thesis hangs on an external event (i.e. FDA approval, gaming law changes, or rising commodity prices). Rethink a thesis after a profit warning. It is usually a sign of a serious internal problem and often can signal deteriorating quality. Quality investing is especially susceptible to the endowment effect given the large due diligence effort up front. Be wary. Checklists are helping to focus on what matters. Inertia analysis (looking at portfolio having done nothing) is especially helpful as often doing nothing is the right decision if you own quality companies.
Definition of quality: The combination of (1) strong and predictable cash generation; (2) sustainably high ROIC and; (3) attractive growth opportunities. The critical link between growth and value creation is IROIC. Industry structure must be considered because even the best run companies in an over supplied, price deflationary industry are unlikely to meet the quality hurdle. Qualitative characteristics are often more important than quantitative ones.
CAPITAL ALLOCATION
A&P: can drive short term sales growth but needs to be sustained long term to drive long term value. Should be classified as an investment rather than expense.
M&A: generally be wary of acquisition led growth but note potential exceptions to the rule (1) consolidation of fragmented industries, (2) buying quality but under penetrated business who could benefit from increased distribution under a larger owner, (3) ability to source deals from privately held companies who aren’t run efficiently, (4) seasoned management team. Red flags include (1) rationale such as diversification, scale, or rapidity, (2) incentive comp linked to absolute size such as revenue or EBITDA growth, (3) multiple larger acquisition in close succession as it may signal a deterioration in the core business.
Measuring Returns: Avoid ROE (net inc / BV) because both metrics can be manipulated by management and it does not consider leverage risks. CROCI uses post tax cash earning over total capital base. Adjust out amortization. Short term incremental margins aren’t necessarily a good guide for future returns because many investment take years to pay off. Gross margins can be a shortcut to understand the competitive position of the business. Consistently high gross and operating is a strong signal of quality.
SOURCES OF GROWTH
Market share gains: Reliable source of growth as they are independent of the economic cycle and largely within managements control. Identify the share donor and look for consistency in the share gains.
Geographic expansion: Success can be tough. A company with unique domestic advantages may struggle to replicate success abroad. Examples: unique distribution agreement, local scale advantages, and regulatory capture. Premium brands transition to new markets relatively easily.
Pricing, mix, and volume: Pricing is the most valuable as it is 100% incremental margin. Mix (ie premiumization) is second as it comes with little incremental costs. Volume growth is least valuable as it comes at the same unit cost (and GM) unless it is an asset light business with fixed costs (ie software or pharma).
Cyclical end market: Risky bet. If investing in cyclicals look for companies that can grow thru the cycle. Market share gains in downturns are a sign of strength.
Structural end market: Look for real sustainable trends. People thought US golf and Chinese cognac sales were structurally growing but they were just long cycles. Trends like disease prevention, urbanization, and aging populations are more likely to prove sources of durable structural growth.
Durability: Assuming high earnings growth will continue is dangerous. ROIC has proved more consistent and should be used as a more reliable indicator of future growth.
MANAGEMENT: Good companies doesn’t mean good management. Look for CEOs that speak candidly, rotate their NEOs to give them exposure to all areas of the business, invest counter cyclically, and maintain a conservative balance sheet. Be wary of those that like to be in the limelight.
INDUSTRY STRUCTURE
Mini monopolies: Better term would be mental monopoly. Customers could choose lots of cigarettes but there is only one option in mind for the smoker.
Partial monopolies: Local advantages. Aggregates businesses is an example. Switching costs are another. Razor blade model. The completion for the handle of fierce but much less so for the replacement blades.
Oligopolies: Number of competitors does not necessarily determine whether industry is attractive. Coke/Pepsi and Airbus/Boeing are duopolies but soft drinks is a much better industry because the buyer base is less concentrated, pricing is more transparent, and the amount spent is much less important.
Barriers to entry: Look for barriers to success too. Industry can be easy to enter but hard to succeed (restaurants). Finding an industry with big firms that still have family ownership is a good sign. Implies organic growth that didn’t require dilutive equity raises (confectionary industry).
Rationality mechanisms: Things to keep rivalry from getting out of hand. Payoff from aggression is deferred. Family owned competitors. Look for industries where there is a sustainable share donor to suppress the need to be aggressive. Competitors talking respectively of each other is a good sign. Be wary of industries with a player benchmarking themselves with a market share metric (KMX?).
Security by obscurity: Niches that are small with modest but consistent growth can be very attractive. They are unlikely to attract much capital as they aren’t as sexy as renewables, robotics, electric vehicles, etc.
CUSTOMER BENEFITS
Intangible: Products that convey image have traditionally had durable pricing power. Vanity is venerable. Products that go on the skin or in the mouth have been better FMCG categories than others over time.
Assurance: Customers will be less price sensitive if the cost of failure is high (smoke detectors, child safety equipment, helmets). This can translate in industrials as well. Mishandling oxygen might be catastrophic.
Convenience: Going to DG instead of WMT despite higher prices.
Customer types: Retail customers are more price sensitive in general but not with small purchases that convey intangible benefits above. Corporate customers are more price sensitive but it’s not all equal. They focus on larger ticket items so smaller purchases conveying a benefit are less scrutinized. Corporate risk aversion is a powerful trait to exploit.
COMPETITIVE ADVANTAGES
Technology: Only a handful of companies have maintained tech advantages over the long term. It is only sustainable if it delivers sustained benefits over long periods of time. Look for consistent R&D. When pace is measured it is typically complex improvements. Also takes competitors longer to catch up if investments were made over a long time. GOOG constantly refining algorithm or Experian regularly updating credit models to make product offering better for end user are good examples.
Network effects: System growth depends advantage. Main worry if it becomes too entrenched regulators will consider it a monopoly.
Distributions: Relationship driven. Service is a key part of the offering. No customer wants to buy an OEM product that can’t be serviced.
BUILDING BLOCKS OF QUALITY
Recurring revenue: Industries with recurring revenue generated from up front sales tend to be attractive. If service is mandated by regulation this increases attractiveness (jet engines, elevators). Look for products with long useful lives as shorter ones will be replaced rather than repaired. Service networks become more valuable as density increases. Upfront payments can be an added benefit given negative working capital.
INVESTMENT FRAMEWORKS
Friendly Middlemen: Selling a product thru an expert with aligned incentives with their client can be value add. Quality usually trumps price. For example a dentist recommending an implant or optometrist prescribing glasses. Not always good as sometime expert can become a costly gatekeeper (financial advisor with mutual funds = pay to play)
Tollroads: Selling a critical input that is a small part of overall cost. Examples: audit, testing, industrial gas, credit ratings. Chr Hansen does cultures. They are 1% of cost of producing the yogurt or cheese but tangibly impact taste and texture. Toll road companies tend to be in oligopoly industries as a sole supplier is too big of a cost.
Innovation dominance: Define the market correctly (diabetics not pharmaceuticals) then look for a concentration in industry R&D spend. Essilor spends 75% of the industry R&D for lens market
Forward integrators: Vertical integration, franchising, and licensing. Only works if brands are strong. Companies with their own operations built from scratch are more likely to succeed than those at mercy of third parties. Franchisors benefit from revenues being more stable than net income. Luxottica is best example of forward integrator. Vertical integration allows them to build brand awareness and dictate fashion trends which reduced inventory risk. The platform also provided superior acquisition synergies. Acquiring a brand gives it immediate access to a large retail network. Acquiring retailers gives them access to more premium product.
Market share gainers: Steady gains over long term are a good sign of quality.
Corporate Culture: Compounds on itself as companies tend to hire people that fit culture they already have. Good thing to look at is how bad news is distributed. Open and honest is healthy. Ask detailed questions about specific markets to see if they know the answer. Family owned companies tend to have particularly good cultures given focus on long term. Look for companies that share ownership with employees.
RISKS
Cyclicality: The longer the cycle the harder to analyze because it becomes easier to mistake cyclical growth for structural growth. Supply led cycles are less attractive than demand led ones as it becomes virtually impossible to predict prices. Look for businesses linked to customers operating rather capex budgets. There are “flow products” and have less cyclicality and less scrutiny due to their small and recurring nature. Low cost producers have reduced competitive advantages because their profitability depends entirely on the commodity price. Producing oil at $20 is great but it is hard to value the business unless you know the price will be $40 or $100.
Innovation/Disruption: Key question is “will this company’s products still be relevant in 10yrs”. Big innovations result in more victims than incumbents admit. It is tempting to blame the company or management for being disrupted but most companies are risk adverse, have slow decision making processes, and haven’t faced significant disruption. As such the main culprit is usually the industry itself.
AVOIDING MISTAKES: 80% of 1yr returns are determined by changes in multiples but nearly all of long terms returns are determined by earnings power.
This disconnect is a sustainable source of alpha. It is hard to overpay for a quality company with truly sustainable earning growth. Well researched qualitative judgments trump quantitive ones in the long term as the latter has just as many subjective inputs. Defending a challenge to a thesis with “Yes, but” is a red flag. Similarly assuming “it’s fully priced in is risky”. Overconfidence bias is especially relevant in scenarios where a thesis hangs on an external event (i.e. FDA approval, gaming law changes, or rising commodity prices). Rethink a thesis after a profit warning. It is usually a sign of a serious internal problem and often can signal deteriorating quality. Quality investing is especially susceptible to the endowment effect given the large due diligence effort up front. Be wary. Checklists are helping to focus on what matters. Inertia analysis (looking at portfolio having done nothing) is especially helpful as often doing nothing is the right decision if you own quality companies.
July 11, 2020
Execellent book on quality investing. In this book you can find a clear definition what is quality investing and what is important for implementing such a strategy. The book is full of short and simple rules how the process for quality investment should look like. Almost all chapters are illustrated with small case studies about listed European companies. Even though I myself invest on similar strategy, but it was definitely worth reading.
Currently reading
November 12, 2020Mandatory reading at Third Point
https://twitter.com/DanielSLoeb1/stat...
GMO on quality
https://www.gmo.com/globalassets/arti...
GMO approach: high profitability/GPM/ROIC; stability in profits (avoid cyclicals); low debt + valuation overlay
https://twitter.com/DanielSLoeb1/stat...
GMO on quality
https://www.gmo.com/globalassets/arti...
GMO approach: high profitability/GPM/ROIC; stability in profits (avoid cyclicals); low debt + valuation overlay
April 18, 2022
“If smart people learn from their own mistakes while wise people learn from the mistakes of others, the goal is to be both smart and wise.”
Helpful examples and case studies with the chapters structured in concise, bite-sized principles. Useful guide to have on the bookshelf as a reminder but nothing is really ground breaking or new imo. The question I am more interested in is - how should one apply these concepts in practice?
Helpful examples and case studies with the chapters structured in concise, bite-sized principles. Useful guide to have on the bookshelf as a reminder but nothing is really ground breaking or new imo. The question I am more interested in is - how should one apply these concepts in practice?
November 19, 2018
The book details investing in so called quality companies (richly valued companies is one definition). Key points to note
1. Focus on cash flow generation RoCE and growth opportunities
2. Typically such companies will have a strong brand pricing power or a niche focus area with more or less recurring revenue
3. Keep reviewing the portfolio and dump the hope trade stocks
1. Focus on cash flow generation RoCE and growth opportunities
2. Typically such companies will have a strong brand pricing power or a niche focus area with more or less recurring revenue
3. Keep reviewing the portfolio and dump the hope trade stocks
March 27, 2021
Torn between giving a 3-star and a 4-star rating but finally decided on 3. On the positive side, there were some unique things or perspectives that I learned. I think the flow of the book was a bit negative. The concepts looked a bit detached from each other and I didn't come out with a clear framework that I can apply.
December 10, 2016
Pretty good. Feel like it's almost an exercise in confirmation bias for my investing philosophy, and I'm cognizant and worried of "fads" similar to the outsiders book haha.
All in all, really solid book. Lots of useful leads in the footnotes as well.
All in all, really solid book. Lots of useful leads in the footnotes as well.
July 22, 2023
Well organised and giving good insights on quality investing. Excellent companion for a future proof investment portfolio.
January 7, 2024
The best book I have read on investing thus far. It deals not with financial metrics and interpretation of financial statements, but rather give pointers for sound fundamental analysis and how to pin-point those businesses which allow for great internal compounding within the business over time.
If you, like me, found that the «durable competitive advantage»-criteria in Buffetts demands for an investment is the hardest, you might find this book beneficial.
I highly recommend this book!
If you, like me, found that the «durable competitive advantage»-criteria in Buffetts demands for an investment is the hardest, you might find this book beneficial.
I highly recommend this book!
December 21, 2025
This book is a practical, easy-to-follow guide, showing how to identify exceptional businesses and, just as importantly, how to think and act once you already own them.
Even the endnotes of this book provide many useful insight and detail information about quality earnings, manipulated accounting practices, etc. I did thoroughly read through to the last endnote, with the help of a magnifier.
Even the endnotes of this book provide many useful insight and detail information about quality earnings, manipulated accounting practices, etc. I did thoroughly read through to the last endnote, with the help of a magnifier.
December 26, 2024
A summary of my approach to investing ie the author really gets it!
We are all looking at the building blocks and how they interact to find patterns of outstanding companies trading at a fair price. Then we just stay in them until the end of time unless factors change (beware boiling frog).
It is all about Chuck Acre’s three leg stooled:
1. Predictable cash generation
2. Sustainable high returns on capital
3. Attractive growth opportunities
The building blocks:
1. Capital allocation ie how effective is management at allocating capital (growth capex/r&d and advertising vs M&A vs. shareholder returns) measured through returns on capital (ROIC, gross margins, asset turnover)
2 sources of growth (market share, geographic, pricing, mix and volume, cyclical, structural end-market growth)
3 management assessing stewardship of capital, candor with communicating to shareholder on issues and long term thinking (maybe family owned)
4 industry structure: mini monopoly most appealing (ASML lithography machine, Tobacco), partial monopoly (when on the whole total share is small but in specific regions have an advantage or switching cost for the product is too high - Software), oligopolies rational players to allow for stability of profits
5 customer benefits: intangible (typically related to taste ie fashion, skin care, soft drinks), assurance (typically related to safety) and convenience (how easy is it to get the customer to reach for your product can also be seen in bundling with cable companies)
6 competitive advantage: barriers to entry (tech, switching cost, network effects, distribution)
Patterns:
1 recurring revenue (service, subscription and license model) can benefit from density/network effects easier to service customer if they are clustered together. The bigger benefit that is seen is requiring little capital to support growth as you create a deferred revenue liability that increases cash inflows to revenues.
2. Friendly middlemen - the helping hand (expert service selling product like an optometrist selling you glasses), lock in (think training those experts on your system ie, windows OS this creates barrier to entry given increasing switching cost.
3. Toll roads - a small and vital cog in an a larger industry (ex rating agency, auditing firms, speciality ingresdients)
4. Low cost producer plus (brands built around low cost ie Uniqlo, IKEA or compounding being the lowest cost producer ie Costco, Ryanair etc)
5. Pricing power - see’s candy or the newspaper are perfect examples of this - very hard to actually see because no one wants to be accused of being a monopoly
6. Brand strength - brands are stories and the longer the story has been around the more likely it continues
7. Innovation culture - high GM give the company more to spend to defend their position and if they are the market share leader they can outspend their competitor 2 to 1 at times. Innovation can come from premiumization or new categories ie taste or packaging. Incremental innovation tends to sit better with customer while big swings create to much volatility in innovation a portfolio approach can smooth the til.
8. Forward integrators - LVMH own store expansion, Nike online push, franchise hotels like Marriott - payoff can be great but need to consider incremental capital requirements. Direct to consumer gives a mini-monopoly while establishing a brand and reputation.
9. Market share gainers - market share gains can drive growth by drawing customers from rivals such growth can be isolated from overall market growth and less dependent on macroeconomic variables. Market share gains reinforce competitive advantages based on scale bigger budgets for everything from R&D to advertising and preference from distributors and suppliers. Something to note for this is that there are cases where it’s okay to lose market share think about Warren Buffett and the insurance market whenever it overheats he lets competitors take share at rates that will likely put them out of business.
10. Global capability and leadership - think about Coca Cola’s expansion overseas and what’s happening now in gaming industry with Chinese developers catching up to the west. It’s all about adapting to the local culture.
11. Culture - trustworthiness, long term thinking (incentives are structure for long term), execution staying the course and executing efficiently. Ownership culture - who are the shareholders families tend to think in generation also skin in the game.
12. Cost to replicate - inversion how much would it take for a new comer to replicate the business and remove the advantages.
Common pitfalls when assessing patterns
1. Cyclicality - think about if the product sold is necessary to maintain and ongoing vs heavily exposed to up and downturn swings. Downturns can affect the status quo of industry too think of customers deferring maintenance or sacrificing reliability for cost. Counter cyclical investment is what you should look for. (Sherwin Williams in 08)
2. Technology - newspapers got killed by the internet
3. Dependency - Goverment approvals when Goverment actions are typically political not rational. Subsidies are typically first to go in crisis. Stakeholder concentration increases risk. New entrants in domestic markets changing regulation. China protecting domestic companies if this changes how will it impact their businesses with dominance
4. Customer preferences - food is going from taste focus to nutritional content, proximity mini monopolies being disrupted by e-commerce, fad risk how many popular things from the 80s are dead today. Good enough goods think of private label vs brands in grocery stores, once a consumer shifts they realize their is not much difference.
All of these pitfalls is related to sustainability of business
Implementation lastly the challenges of sticking to quality investing is
1 battling short term thinking
2 conquering prevailing preference for hard numerical data over subjective assessment of quality
3 accepting quality companies may not be the sexiest industries
4 accepting the price often what looks expensive is understated and what is cheap is overstated. so we stress quality over valuation (L’Oréal was a 5b business in 1990 25 years later its $110b) no dcf would show you think because the assumptions are too hard to forecast but if quality is enduring and sustainable the numbers will take care of themselves.
Investment in knowledge pays the best interest - Benjamin Franklin
We are all looking at the building blocks and how they interact to find patterns of outstanding companies trading at a fair price. Then we just stay in them until the end of time unless factors change (beware boiling frog).
It is all about Chuck Acre’s three leg stooled:
1. Predictable cash generation
2. Sustainable high returns on capital
3. Attractive growth opportunities
The building blocks:
1. Capital allocation ie how effective is management at allocating capital (growth capex/r&d and advertising vs M&A vs. shareholder returns) measured through returns on capital (ROIC, gross margins, asset turnover)
2 sources of growth (market share, geographic, pricing, mix and volume, cyclical, structural end-market growth)
3 management assessing stewardship of capital, candor with communicating to shareholder on issues and long term thinking (maybe family owned)
4 industry structure: mini monopoly most appealing (ASML lithography machine, Tobacco), partial monopoly (when on the whole total share is small but in specific regions have an advantage or switching cost for the product is too high - Software), oligopolies rational players to allow for stability of profits
5 customer benefits: intangible (typically related to taste ie fashion, skin care, soft drinks), assurance (typically related to safety) and convenience (how easy is it to get the customer to reach for your product can also be seen in bundling with cable companies)
6 competitive advantage: barriers to entry (tech, switching cost, network effects, distribution)
Patterns:
1 recurring revenue (service, subscription and license model) can benefit from density/network effects easier to service customer if they are clustered together. The bigger benefit that is seen is requiring little capital to support growth as you create a deferred revenue liability that increases cash inflows to revenues.
2. Friendly middlemen - the helping hand (expert service selling product like an optometrist selling you glasses), lock in (think training those experts on your system ie, windows OS this creates barrier to entry given increasing switching cost.
3. Toll roads - a small and vital cog in an a larger industry (ex rating agency, auditing firms, speciality ingresdients)
4. Low cost producer plus (brands built around low cost ie Uniqlo, IKEA or compounding being the lowest cost producer ie Costco, Ryanair etc)
5. Pricing power - see’s candy or the newspaper are perfect examples of this - very hard to actually see because no one wants to be accused of being a monopoly
6. Brand strength - brands are stories and the longer the story has been around the more likely it continues
7. Innovation culture - high GM give the company more to spend to defend their position and if they are the market share leader they can outspend their competitor 2 to 1 at times. Innovation can come from premiumization or new categories ie taste or packaging. Incremental innovation tends to sit better with customer while big swings create to much volatility in innovation a portfolio approach can smooth the til.
8. Forward integrators - LVMH own store expansion, Nike online push, franchise hotels like Marriott - payoff can be great but need to consider incremental capital requirements. Direct to consumer gives a mini-monopoly while establishing a brand and reputation.
9. Market share gainers - market share gains can drive growth by drawing customers from rivals such growth can be isolated from overall market growth and less dependent on macroeconomic variables. Market share gains reinforce competitive advantages based on scale bigger budgets for everything from R&D to advertising and preference from distributors and suppliers. Something to note for this is that there are cases where it’s okay to lose market share think about Warren Buffett and the insurance market whenever it overheats he lets competitors take share at rates that will likely put them out of business.
10. Global capability and leadership - think about Coca Cola’s expansion overseas and what’s happening now in gaming industry with Chinese developers catching up to the west. It’s all about adapting to the local culture.
11. Culture - trustworthiness, long term thinking (incentives are structure for long term), execution staying the course and executing efficiently. Ownership culture - who are the shareholders families tend to think in generation also skin in the game.
12. Cost to replicate - inversion how much would it take for a new comer to replicate the business and remove the advantages.
Common pitfalls when assessing patterns
1. Cyclicality - think about if the product sold is necessary to maintain and ongoing vs heavily exposed to up and downturn swings. Downturns can affect the status quo of industry too think of customers deferring maintenance or sacrificing reliability for cost. Counter cyclical investment is what you should look for. (Sherwin Williams in 08)
2. Technology - newspapers got killed by the internet
3. Dependency - Goverment approvals when Goverment actions are typically political not rational. Subsidies are typically first to go in crisis. Stakeholder concentration increases risk. New entrants in domestic markets changing regulation. China protecting domestic companies if this changes how will it impact their businesses with dominance
4. Customer preferences - food is going from taste focus to nutritional content, proximity mini monopolies being disrupted by e-commerce, fad risk how many popular things from the 80s are dead today. Good enough goods think of private label vs brands in grocery stores, once a consumer shifts they realize their is not much difference.
All of these pitfalls is related to sustainability of business
Implementation lastly the challenges of sticking to quality investing is
1 battling short term thinking
2 conquering prevailing preference for hard numerical data over subjective assessment of quality
3 accepting quality companies may not be the sexiest industries
4 accepting the price often what looks expensive is understated and what is cheap is overstated. so we stress quality over valuation (L’Oréal was a 5b business in 1990 25 years later its $110b) no dcf would show you think because the assumptions are too hard to forecast but if quality is enduring and sustainable the numbers will take care of themselves.
Investment in knowledge pays the best interest - Benjamin Franklin
April 20, 2021
Overall a good book. Clearly a lot of wisdom in the book but tries a bit too hard to fit in a very broad set of perspectives without providing sufficient, substantiated depth to be truly insightful.
June 24, 2024
Quick and easy read. Good for case studies. Book structure is loosey-goosey. I appreciate the insight that the more dull investment choice may be the better choice. However, the cult of owning quality companies at any price has spread far and wide since this book was originally published in early 2016. I wonder if there are studies for the last 5-10 year period showing the persistence in outperformance of quality vs. the benchmarks? Best I could do as a quick sanity check is to comp GMO Quality Fund vs. S&P 500 over the last 5 years -- net of fees it has annualized ~90 bps higher than the index -- pretty good! Conversely, Oakmark Select Fund that runs concentrated and does pay attention to valuation has largely kept up and even outperformed the index until May of 2024. Obviously, there is a question of prospective returns as well.
Useful stats:
"Profit warning is potentially a symptom of deep-seated problems. Our own research among European companies indicates that one-third of those issuing large profit warnings (measured as causing a stock price drop exceeding 10%) issued another, usually larger, profit warning within one year."
"Expert estimates are consistently wrong in aggregate, routinely by more than 10%."
"Although on a one-year view, nearly 80% of stock price moves are explained by changes in multiples, the driver of longer-term stock returns is earnings growth."
Points for quality:
"Quality companies have historically fared much better than the market amid economic upheaval. The relative certainty provided by higher margins, stronger returns, greater visibility and more robust balance sheets becomes disproportionately valuable."
"Many of the best companies are simple businesses that have done what they do consistently for decades. Worse, their quality is often, to some extent, already appreciated. Many investors would agree that Hermès and L'Oréal are outstanding companies. A general sense of quality is reflected in their stock prices, which usually trade at a market premium -- although far lower than we believe that quality is worth... successful quality investing, therefore sometimes requires avoiding the temptation of apparently exciting investment discoveries. It means accepting the relative dullness of analyzing what is often in plain view."
"Markets tend to under-value quality companies... Share prices, even when at seemingly high valuation multiples, often fail to fully capture the combination of predictability and value creation such companies offer. Explanations for this phenomenon include market incentives skewed to the short term, a pervasive presumption of mean reversion that does not automatically apply to well-positioned companies, and an under-appreciation of earnings upside for quality companies."*
*Summarized footnotes:
- 1965-2012 GMO study of 1000 large US companies stratified them for quality based on low leverage, high profitability, low profit volatility and low beta. The study compared performance of the highest quartile vs. benchmark returns. The factors all delivered annual outperformance versus benchmark over the period. The results ranged from 0.8% for low leverage to 0.4% for high profitability and low volatility. Low beta, which by its own definition should yield below-market returns, delivered annualized outperformance of 0.5%.
- Institutional bias toward high-beta stocks may contribute to quality underpricing: a) aum inflows are greater when stock market averages rise -- to outperform in rising (bull) markets, therefore, becomes more valuable than outperforming in bear markets, which skews institutional bias toward higher beta stocks; and b) most institutional investors are restricted from using leverage, and consequently overweight high beta stocks to generate higher returns than their benchmarks.
Useful stats:
"Profit warning is potentially a symptom of deep-seated problems. Our own research among European companies indicates that one-third of those issuing large profit warnings (measured as causing a stock price drop exceeding 10%) issued another, usually larger, profit warning within one year."
"Expert estimates are consistently wrong in aggregate, routinely by more than 10%."
"Although on a one-year view, nearly 80% of stock price moves are explained by changes in multiples, the driver of longer-term stock returns is earnings growth."
Points for quality:
"Quality companies have historically fared much better than the market amid economic upheaval. The relative certainty provided by higher margins, stronger returns, greater visibility and more robust balance sheets becomes disproportionately valuable."
"Many of the best companies are simple businesses that have done what they do consistently for decades. Worse, their quality is often, to some extent, already appreciated. Many investors would agree that Hermès and L'Oréal are outstanding companies. A general sense of quality is reflected in their stock prices, which usually trade at a market premium -- although far lower than we believe that quality is worth... successful quality investing, therefore sometimes requires avoiding the temptation of apparently exciting investment discoveries. It means accepting the relative dullness of analyzing what is often in plain view."
"Markets tend to under-value quality companies... Share prices, even when at seemingly high valuation multiples, often fail to fully capture the combination of predictability and value creation such companies offer. Explanations for this phenomenon include market incentives skewed to the short term, a pervasive presumption of mean reversion that does not automatically apply to well-positioned companies, and an under-appreciation of earnings upside for quality companies."*
*Summarized footnotes:
- 1965-2012 GMO study of 1000 large US companies stratified them for quality based on low leverage, high profitability, low profit volatility and low beta. The study compared performance of the highest quartile vs. benchmark returns. The factors all delivered annual outperformance versus benchmark over the period. The results ranged from 0.8% for low leverage to 0.4% for high profitability and low volatility. Low beta, which by its own definition should yield below-market returns, delivered annualized outperformance of 0.5%.
- Institutional bias toward high-beta stocks may contribute to quality underpricing: a) aum inflows are greater when stock market averages rise -- to outperform in rising (bull) markets, therefore, becomes more valuable than outperforming in bear markets, which skews institutional bias toward higher beta stocks; and b) most institutional investors are restricted from using leverage, and consequently overweight high beta stocks to generate higher returns than their benchmarks.
February 25, 2024
Key takeaways:
3 main Indicators of quality:
• strong predictable cash generation
• sustainably high returns on capital
• attractive growth opportunities
- Focus on the process rather than the outcome.
- "To think is easy. To act is hard. But the hardest thing in the world is to act in accordance with your thinking"
- Make checklists for investment guidelines and steps for DD
- Quality first, valuation second - think long term
Summary:
Building Blocks to look for in a company for Quality Investing
1. Capital Allocation
a. Growth capex - deployment od capital for the purposes of generating organic growth
b. Leverage network growth
c. Be aware of working capital
2. Return on Capital (+ return of equity)
a. Assets turns
b. Profit margins
c. Cash conversion
3. Multiple Sources of Growth
a. Pricing power
b. Price/mix optimization
4. Good Management
a. People matter
5. Industry Structure
6. Customer Benefits
7. Competitive Advantages
a. Tech
b. Network effects
c. Distribution advantages
Established Patterns to look for in companies
1. Recurring Revenue
a. Density + network effect
b. Subscription and service revenue
2. Friendly Middlemen
3. Toll Roads
4. Low Price – Plus
a. Low cost + enhancing features
b. scale
5. Pricing power
6. Brand Strength
7. Innovation Dependence
8. Forward Integrators
a. Store ownership, franchising, licensing, internet selling
9. Market Share gainers
10. Global capabilities and leadership
11. Corporate Culture
a. Examples: scientific curiosity, credit quality
12. Cost to Replicate
Pitfalls
1. Cyclicality
a. High quality companies rise with cyclicality
b. Silent killer - customer cyclicality
2. Tech Innovation
3. Dependency
4. Shifting customer preferences
a. Hype
b. Minimize risk of error by maintaining a systematic process.
Implementation
1. Adopt and sustain a long term outlook
2. Avoid to many decision-makers in the investment process
3. Often we seek the obscure instead of the obvious - Avoid the temptation of exciting investments (hype)
4. Be aware of biases:
1. Overconfidence
2. Hindsight
3. Outcome
- Focus as far as possible on the process rather than the outcome
5. Avoid drastic mistakes such as companies with substantial financial debt with high operation leverage (especially for retail and during economic expansion)
6. Endowment effect: When the argument for holding a position starts with "yes, but" it means that a mistake has been identified and someone is unwilling to admit that. Instead, ask whether with a fresh start, you would still buy the same company today.
7. Learn accountings for earnings growth, cash flows and returns on capital
8. Quality first, valuation second
9. Scuttlebutt method: attack a subject from multiple angles
10. Checklist
1. The desired attributes for an investment
2. Steps for full due diligence
Inertia analysis - which compares the hypothetical performance of an unchanged portfolio with actual performance: the comparison reflects how much value trading decisions add ( or subtract )
3 main Indicators of quality:
• strong predictable cash generation
• sustainably high returns on capital
• attractive growth opportunities
- Focus on the process rather than the outcome.
- "To think is easy. To act is hard. But the hardest thing in the world is to act in accordance with your thinking"
- Make checklists for investment guidelines and steps for DD
- Quality first, valuation second - think long term
Summary:
Building Blocks to look for in a company for Quality Investing
1. Capital Allocation
a. Growth capex - deployment od capital for the purposes of generating organic growth
b. Leverage network growth
c. Be aware of working capital
2. Return on Capital (+ return of equity)
a. Assets turns
b. Profit margins
c. Cash conversion
3. Multiple Sources of Growth
a. Pricing power
b. Price/mix optimization
4. Good Management
a. People matter
5. Industry Structure
6. Customer Benefits
7. Competitive Advantages
a. Tech
b. Network effects
c. Distribution advantages
Established Patterns to look for in companies
1. Recurring Revenue
a. Density + network effect
b. Subscription and service revenue
2. Friendly Middlemen
3. Toll Roads
4. Low Price – Plus
a. Low cost + enhancing features
b. scale
5. Pricing power
6. Brand Strength
7. Innovation Dependence
8. Forward Integrators
a. Store ownership, franchising, licensing, internet selling
9. Market Share gainers
10. Global capabilities and leadership
11. Corporate Culture
a. Examples: scientific curiosity, credit quality
12. Cost to Replicate
Pitfalls
1. Cyclicality
a. High quality companies rise with cyclicality
b. Silent killer - customer cyclicality
2. Tech Innovation
3. Dependency
4. Shifting customer preferences
a. Hype
b. Minimize risk of error by maintaining a systematic process.
Implementation
1. Adopt and sustain a long term outlook
2. Avoid to many decision-makers in the investment process
3. Often we seek the obscure instead of the obvious - Avoid the temptation of exciting investments (hype)
4. Be aware of biases:
1. Overconfidence
2. Hindsight
3. Outcome
- Focus as far as possible on the process rather than the outcome
5. Avoid drastic mistakes such as companies with substantial financial debt with high operation leverage (especially for retail and during economic expansion)
6. Endowment effect: When the argument for holding a position starts with "yes, but" it means that a mistake has been identified and someone is unwilling to admit that. Instead, ask whether with a fresh start, you would still buy the same company today.
7. Learn accountings for earnings growth, cash flows and returns on capital
8. Quality first, valuation second
9. Scuttlebutt method: attack a subject from multiple angles
10. Checklist
1. The desired attributes for an investment
2. Steps for full due diligence
Inertia analysis - which compares the hypothetical performance of an unchanged portfolio with actual performance: the comparison reflects how much value trading decisions add ( or subtract )
March 31, 2024
A great read for every finance enthusiast.
It provides insightful perspectives into what has been a successful investment strategy at AKO Capital: identifying quality companies (predictable cash generation, sustainable high returns on capital, and attractive growth opportunities), with many real-life examples.
Highlights:
- Quality stocks will often appear to be expensive.
- Capital is drawn towards ideas that can change the world and make big money fast. An obscure and "boring" industry tends to face lower disruption risk, making attractive industry structures more durable.
- Diversification can be "diworsification."
- The advantage of having low working capital.
- The power of recurring revenues, either through licenses or services (such as elevators or jet engines).
- "Friendly middlemen," like how Geberit uses licensed plumbers to sell lavatory products.
- "Toll roads" as some companies offer a small but vital service to their customers. These companies are typically oligopolies, such as Moody's/S&P/Fitch credit ratings and the Big 4 auditing firms.
- "Low-price plus" This strategy involves low pricing combined with protection against the vulnerability it creates (such as IKEA, H&M, Ryanair).
- Importance of innovation culture and R&D spending (Novo Nordisk).
- Long-lasting family ownership in companies can actually be beneficial for corporate culture. They typically avoid excessive leverage and operate in high-barrier-to-entry and stable markets (Lindt).
- The vulnerability of competitive advantage tied to regulations (e.g., renewable energy subsidies).
Quotes:
- "It's better to buy a great company at a fair price than a fair company at a great price." - Charlie Munger
- "Einstein famously referred to compound interest as the eighth wonder of the world. Compound growth in cash flow can be equally miraculous."
- "To think is easy. To act is hard. But the hardest thing in the world is to act in accordance with your thinking." - Goethe
It provides insightful perspectives into what has been a successful investment strategy at AKO Capital: identifying quality companies (predictable cash generation, sustainable high returns on capital, and attractive growth opportunities), with many real-life examples.
Highlights:
- Quality stocks will often appear to be expensive.
- Capital is drawn towards ideas that can change the world and make big money fast. An obscure and "boring" industry tends to face lower disruption risk, making attractive industry structures more durable.
- Diversification can be "diworsification."
- The advantage of having low working capital.
- The power of recurring revenues, either through licenses or services (such as elevators or jet engines).
- "Friendly middlemen," like how Geberit uses licensed plumbers to sell lavatory products.
- "Toll roads" as some companies offer a small but vital service to their customers. These companies are typically oligopolies, such as Moody's/S&P/Fitch credit ratings and the Big 4 auditing firms.
- "Low-price plus" This strategy involves low pricing combined with protection against the vulnerability it creates (such as IKEA, H&M, Ryanair).
- Importance of innovation culture and R&D spending (Novo Nordisk).
- Long-lasting family ownership in companies can actually be beneficial for corporate culture. They typically avoid excessive leverage and operate in high-barrier-to-entry and stable markets (Lindt).
- The vulnerability of competitive advantage tied to regulations (e.g., renewable energy subsidies).
Quotes:
- "It's better to buy a great company at a fair price than a fair company at a great price." - Charlie Munger
- "Einstein famously referred to compound interest as the eighth wonder of the world. Compound growth in cash flow can be equally miraculous."
- "To think is easy. To act is hard. But the hardest thing in the world is to act in accordance with your thinking." - Goethe
March 10, 2023
I really enjoyed this one! This is an excellent hand-guide to what to look and look out for in researching high quality companies for investment. I found the book fairly dense with information and technical terms, but I think it is extremely well done with many case examples. AOK capital has done the world a favor by publishing their internal guidebook and notes from this past decade and for being so honest about both successes and failures.
Their failures in particular made me realize just how hard it is to do this kind of investing well. You can invest in a promising company that seems to have a great moat, but the destructive forces of capitalism vanquish most high returns on capital over the long run and if you overpaid or didn't recognize a warning sign then you won't do well. They are quite honest about this difficulty, and list numerous features they look for to find slower-changing businesses with more durable moats. This may be the single best reading on styles of moats that I've come across. It made me realize just how deeply you need understand the companies in question if you expect to hold for a long time. Because of this, it is not as simple as many buy and hold advocates seem to think unless you accept average returns. I would say this style of investing is definitely more challenging than traditional value investing. You have to deeply understand a business to understand where it is going over the next 10+ years, whereas with value investing you only have to understand the present and next couple of years to assess if something is cheap and has a factor of safety. When these two things are combined (cheap and quality - Joel Greenblatt approach) fantastic things can happen. Quality, though subjective, is definitely worth learning how to spot as it will add another layer of Margin of Safety.
Their failures in particular made me realize just how hard it is to do this kind of investing well. You can invest in a promising company that seems to have a great moat, but the destructive forces of capitalism vanquish most high returns on capital over the long run and if you overpaid or didn't recognize a warning sign then you won't do well. They are quite honest about this difficulty, and list numerous features they look for to find slower-changing businesses with more durable moats. This may be the single best reading on styles of moats that I've come across. It made me realize just how deeply you need understand the companies in question if you expect to hold for a long time. Because of this, it is not as simple as many buy and hold advocates seem to think unless you accept average returns. I would say this style of investing is definitely more challenging than traditional value investing. You have to deeply understand a business to understand where it is going over the next 10+ years, whereas with value investing you only have to understand the present and next couple of years to assess if something is cheap and has a factor of safety. When these two things are combined (cheap and quality - Joel Greenblatt approach) fantastic things can happen. Quality, though subjective, is definitely worth learning how to spot as it will add another layer of Margin of Safety.
March 21, 2022
An excellent book that covers many of the investing frameworks used by AKO capital in its hunt for quality companies. A few memorable notes/concepts:
-Real value comes from sustained campaigns aimed at brand building
-Investments in R&D and advertising expenses can be better conceived as investments in certain cases rather than just expenses (i.e. brand advertising expense required to sustain awareness is maintenance capex)
-Organic growth is typically better than M&A, but there could be situations where acquisitions could add value (i.e. consolidation of fragmented industries/roll-ups, buying businesses that is already strong, leveraging network benefits through larger distribution network)
-Company's working capital burden often reflects its bargaining power with other stakeholders
-Return on capital is the best expression of industrial positioning and competitive advantages
-Gross profit margin is the purest expression of customer valuation of a product (i.e. coke vs. other soda makers), and sustained high gross profit margin relative to peers tend to indicate a durable competitive advantage
-Companies with high gross margin and operating margins = strong competitive advantage sustainable at tolerable cost
-In investing, experience counts. Mistakes and successes help to reveal what works and what fails. If investing were simply about following a rulebook, such practical learning would be unnecessary. However, a clear, consistent investment philosophy works best if combined with a willingness to adapt and learn from experience. Quality investing is a process of life-long learning rather than a static prescription. We agree with Benjamin Franklin that an "investment in knowledge pays the best interest"
-Real value comes from sustained campaigns aimed at brand building
-Investments in R&D and advertising expenses can be better conceived as investments in certain cases rather than just expenses (i.e. brand advertising expense required to sustain awareness is maintenance capex)
-Organic growth is typically better than M&A, but there could be situations where acquisitions could add value (i.e. consolidation of fragmented industries/roll-ups, buying businesses that is already strong, leveraging network benefits through larger distribution network)
-Company's working capital burden often reflects its bargaining power with other stakeholders
-Return on capital is the best expression of industrial positioning and competitive advantages
-Gross profit margin is the purest expression of customer valuation of a product (i.e. coke vs. other soda makers), and sustained high gross profit margin relative to peers tend to indicate a durable competitive advantage
-Companies with high gross margin and operating margins = strong competitive advantage sustainable at tolerable cost
-In investing, experience counts. Mistakes and successes help to reveal what works and what fails. If investing were simply about following a rulebook, such practical learning would be unnecessary. However, a clear, consistent investment philosophy works best if combined with a willingness to adapt and learn from experience. Quality investing is a process of life-long learning rather than a static prescription. We agree with Benjamin Franklin that an "investment in knowledge pays the best interest"
November 21, 2023
Another brilliant geeky finance book.
Favorite quotes;
- «to think is easy. To act is hard. But the hardest thing in the world is to act in accordance with your own thinking.» Goethe
- «investment in knowledge pass the best interest» B. Franklin
Key takeaways;
- quality investing focuses on the exceptions to the rule that abnormal outcomes cannot presist, steking companies boasting a combination of traits that overcome the forces of mean reversion
- «tomorrow stocks»; problem is that the day seldom comes
- a quality investing strategy, therefore, emphasizes quality first and valuation second
- many investing mistakes can be traced to overlooking the downside risks of debt or its sources. … particularly when companies combine substantial Financial debt with high operating leverage
- Albert Einstein famously referred to compound interest as the eigth Wonder of the world. Compound growth in cash flow can be equally miraculous.
- patterns; recurring revenue, friendly middlemen, toll roads, low-price plus, pricing power, Brand strength, innovation dominance, forward integrators, market share gainers, global capabilities and leadership, corporate culture + cost to replicate
- pitfalls; cyclicality, technological innovation, dependency, shifting customer preferences
Favorite quotes;
- «to think is easy. To act is hard. But the hardest thing in the world is to act in accordance with your own thinking.» Goethe
- «investment in knowledge pass the best interest» B. Franklin
Key takeaways;
- quality investing focuses on the exceptions to the rule that abnormal outcomes cannot presist, steking companies boasting a combination of traits that overcome the forces of mean reversion
- «tomorrow stocks»; problem is that the day seldom comes
- a quality investing strategy, therefore, emphasizes quality first and valuation second
- many investing mistakes can be traced to overlooking the downside risks of debt or its sources. … particularly when companies combine substantial Financial debt with high operating leverage
- Albert Einstein famously referred to compound interest as the eigth Wonder of the world. Compound growth in cash flow can be equally miraculous.
- patterns; recurring revenue, friendly middlemen, toll roads, low-price plus, pricing power, Brand strength, innovation dominance, forward integrators, market share gainers, global capabilities and leadership, corporate culture + cost to replicate
- pitfalls; cyclicality, technological innovation, dependency, shifting customer preferences
August 9, 2025
The read was a bit disorganized at first, but the framework towards the latter half is what earned a 4/5 rating. This is an excellent read given its broad applicability. All investors should understand that quality businesses need growth opportunities, stable/predictable cash flow generation, and the ability to generate returns on those investments. These attributes come from a myriad of sustainable strengths, which boil down to barriers to entry that prolong long-term competitive advantages. Through characteristics such as favorable pricing, branding, distribution, network effects, technology, and "magic ingredients" or "toll roads," an investment can effectively generate long-term returns that avoid mean reversion and defy finance dogmatic principles. Through this, one must be cognizant of emotional biases, concentration, cyclicality, customer dependence, and innovation disruptions that can erode or eliminate profits.
The case studies felt messy when reading, but the conceptual framework was generally timeless. This is a suitable read for all investors despite the principles targeting value investing (i.e., no discussions on purchase price to drive value).
The case studies felt messy when reading, but the conceptual framework was generally timeless. This is a suitable read for all investors despite the principles targeting value investing (i.e., no discussions on purchase price to drive value).
May 6, 2024
QUALITY INVESTING imparts some tried-and-true principles of long-term investing from Portfolio Managers at AKO Capital, a London-based equity fund that claims a track record of market-beating returns. Underlying this pattern of success, the authors argue, is an affinity for picking companies with strong, predictable cash generation; sustainably high returns on capital; and attractive growth potential. These include global conglomerates such as Hermès, Novo Nordisk, KONE, L’Oréal, and Unilever. Shying away from using technical equities analysis to assess stock quality, the authors contend that certain intangible characteristics – such as reputationally sound management, niche market exploitation, and brand strength – matter as much as quantitative characteristics such as gross margins, market share, and cumulative cost-competitiveness. While stock picking is inherently an art, QUALITY INVESTING demonstrates that success can be condensed to a science of picking high quality companies with a proven record of performance.
December 10, 2021
This is by far the best book to read to understand why certain business models thrive... read this in University alongside "Why Moats Matter"... those 2 are the gold standard imo... this book has no bs, no long winded excerpts that are irrelevant and verbose... goes into many interesting concepts and gets right to the point... each concept, they provide a few real life companies the concepts apply to so its not like some abstract concept that you shake your head and ur like wtf to... some really interesting niche moats too that's not just the cookie cutter variation of Porter 5 Forces that really make you think (eg. Costco/Ryanair -> compounding of cost savings everywhere), (Chr. Hansen/O-Ring -> small part of overall cost (cultures/O-ring) that provide significant value prop. to end customer = pricing power, actually applied this concept this company, Real Matters I looked into at work)....great ROI in terms of knowledge/time ... would fk with this book
June 19, 2018
Solid overview of quality with good examples
Enjoyed reading about how AKO define quality and some of the things to avoid (or seek out in the case of shorts!) The authors provide good examples of a variety of types of businesses with strong economic moats in sometimes atypical ways. Not sure that I agree that quality is worth any price, but can see their point on how the market misses the lack of operational volatility and the ability to reinvest cash flow in productive ways.
Enjoyed reading about how AKO define quality and some of the things to avoid (or seek out in the case of shorts!) The authors provide good examples of a variety of types of businesses with strong economic moats in sometimes atypical ways. Not sure that I agree that quality is worth any price, but can see their point on how the market misses the lack of operational volatility and the ability to reinvest cash flow in productive ways.
September 3, 2025
A dense but rewarding deep dive into what makes great companies truly worth owning for the long term. Quality Investing goes beyond the usual investing clichés and builds a clear framework based on return on capital, cash flow predictability, and smart capital allocation.
It reads more like a textbook than a narrative — so it’s best for thoughtful investors who enjoy slow, analytical reading.
If you’re into long-term compounding and want to sharpen your eye for moats, this one’s a gem.
It's more a textbook than a reading book. You have to study it.
It reads more like a textbook than a narrative — so it’s best for thoughtful investors who enjoy slow, analytical reading.
If you’re into long-term compounding and want to sharpen your eye for moats, this one’s a gem.
It's more a textbook than a reading book. You have to study it.
July 31, 2017
Nowadays there are many books talking about competitive advantage and this one is one of the best contributions I have read, although it doesn't say too much new.
From an european investor perspective I would recommend it because most of the companies used as examples are european ones, which is something unbelievable in an investing book, but no so surprising taking into account the nationality of the main author.
Negative: It is VERY expensive using a Price/Value ratio.
From an european investor perspective I would recommend it because most of the companies used as examples are european ones, which is something unbelievable in an investing book, but no so surprising taking into account the nationality of the main author.
Negative: It is VERY expensive using a Price/Value ratio.
June 24, 2023
Enjoyable read; resonate with accounting frustrations. I gently state that the general sentiment of the book is nothing far from all of the other Berkshire narratives. Simultaneously, the book provides practical factors to look out for and provides ample cases of successes/failures.
A small note to self, this book doesn't really caution on Goodhart's Law. Think it could have been worth noting? As with all books, will have to revisit.!
A small note to self, this book doesn't really caution on Goodhart's Law. Think it could have been worth noting? As with all books, will have to revisit.!
November 25, 2025
This text provides tangible insights into what it means to be a picky and successful long-term value investor. The idea of "quality" is key to analyzing every financial and management decision. To an extent, all roads lead back to ROIC spread. Cunningham's argument is founded on the conviction that the best businesses, which exist, can generate long-term positive economic profits, thereby rejecting the popular economic belief in mean reversion.
June 24, 2021
Great checklist when making investment decisions. The best part of the book, and that also adds great value, are the final chapters. Provide examples of errors at the time of buying / selling or even keeping some stocks in your portfolio.
Most of the investment books revolve around the sp500, it was great to see examples with European companies.
Most of the investment books revolve around the sp500, it was great to see examples with European companies.
August 12, 2025
- Types of moats: Brand Loyalty (Coke), Network effects (Visa), high switching costs (Microsoft) and unique patents
- On switching costs: this could expand further away from consumer facing tech. SAP/Oracle etc could also be included. In addition, medical devices that require extensive training on a certain brand also could garner high switching cost effect
- On switching costs: this could expand further away from consumer facing tech. SAP/Oracle etc could also be included. In addition, medical devices that require extensive training on a certain brand also could garner high switching cost effect
November 9, 2019
Great investing book
Great investing book about quality investing. Goes from theory to practice, still has valid examples of industries and companies, and characterizes the challenges in quality investing.
Great investing book about quality investing. Goes from theory to practice, still has valid examples of industries and companies, and characterizes the challenges in quality investing.
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