Ben Graham - "The Intelligent Investor"
“There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favourable prices exist, full advantage should be taken of the situation.”
Philip A. Fisher, ‘Developing an Investment Philosophy’, 1980
The moral of this is that only an excellent business bought at an excellent price makes an excellent investment. One without the other just won’t do.
Investors start from the premise that there is no philosophical distinction between part ownership (i.e. buying shares in a company) and outright ownership (i.e. buying the business in its entirety). All we are looking for is pieces of businesses to buy at the right price.
Warren Buffett put it thus:
“Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever.”¹
Criteria for Stock Selection
It follows that there are several important criteria that companies selected for investment consideration must exhibit in abundance. Among these are that:
- Their business model is easily comprehensible;
- They produce transparent financial statements;
- They demonstrate consistent operational performance with earnings being relatively predicable;
- They generate high returns on capital employed;
- They convert a high proportion of accounting earnings into free cash;
- Their balance sheet is strong without unduly high financial leverage;
- Their management is focused on delivering shareholder value and is candid with the owners of the business;
- Their growth strategy is more likely to rely on organic initiatives than frenetic acquisition activity.