Sunday, 17 December 2017

Quality has outperformed the market by 40% over 50 years!

QUALITY HAS OUTPERFORMED

Quality companies are defined as those with high profitability, low profit volatility and minimal use of leverage.

Quality has outperformed the market by 40% over 50 years!

Amazingly, this out-performance is not because of an unwinding of some sort of specific risk.

It came from management teams of wonderful businesses simply reinvesting in their competitive advantages and generating more cash which they reinvested to generate further cash – an autocatalytic process that is the hall mark of intrinsic value.

Such excess return, combined with less fundamental risk, is called a “free lunch”.



BEATING THE MARKET

The Efficient Market Hypothesis refutes the existence of “$100 bills lying on the side walk waiting to be picked up by investors”.

The theory hypothesizes that these opportunities will be immediately arbitraged away, thus preventing anyone from getting rich on them.

Yet this is what Warren Buffett has been doing.

"Investing in wonderful businesses) is like having a Triple A Bond outperforming the B+ bond in the long term by 1% a year, when in a reasonable world, it “should” yield, say, 1% less. "

Now would be a good time to circle back to Keynes and validate his reasons for concentrating his portfolio in “well managed industrial companies that compound value by re-investing part of their profits.”

“Quality” has outperformed the market forever: The S&P had a High Grade Index that started in 1925 and handsomely outperformed the S&P 500 to the end of 1965'.


http://www.firstavenue.co.za/sites/default/files/downloads/the_evolution_of_valuation_22112011.pdf

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