Core Philosophy: Anchoring to Business Quality, Not Price

 

Core Philosophy: Anchoring to Business Quality, Not Price

The guide's foundation is pure quality-focused, long-term ownership. It echoes the philosophies of Warren Buffett, Charlie Munger, and Philip Fisher (whose quote concludes it). The central message is: your decision to sell should be tied to the underlying business's fundamentals and your personal capital needs, not to stock price movements or market noise.

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Analysis of "WHEN TO SELL" (The Valid Reasons)

1. WRONG FACTS: This is the "admit your mistake" clause. It requires intellectual honesty. If your initial thesis was flawed (you overestimated management, misunderstood the business model, or missed a weak moat), selling is correct. Pride and ego are the enemies here.

2. CHANGING FACTS: This is crucial for dynamic investing. A business is not a static asset. Deteriorating fundamentals (falling returns on capital, poor acquisitions, ethical lapses in management) invalidate the original reason to hold. This forces continuous monitoring of the business, not the stock quote.

3. NO CASH FOR A BETTER OPPORTUNITY: This is a sophisticated portfolio management concept. It acknowledges opportunity cost. However, it comes with a major caveat: you must be highly confident that the new opportunity is significantly better. Swapping a great business for a marginally cheaper one is often a mistake.

4. NEED CASH: A practical, non-investment reason. It underscores that investing serves life goals. This reason should be planned for (via an emergency fund or staggered liquidity needs) to avoid forced selling at inopportune times.

The common thread: Each valid reason is fundamental or personal, not technical or speculative.

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Analysis of "DO NOT SELL" (The Behavioral Pitfalls)

This section brilliantly tackles the emotional reflexes that destroy long-term returns.

1. "STOCK IS OVERPRICED":

   • Challenges Market Timing: It rightly questions the investor's ability to define "overpriced" for a compounding machine. A high P/E ratio can persist for years if growth continues.

   • Forward-Looking Perspective: It shifts focus from static multiples to the 10-year potential. This is the heart of value investing—estimating future cash flows.

   • The Compounding Argument: The "quadruple in size" example is powerful. If you expect 15% annualized returns, paying a 50% premium today might still deliver outstanding absolute returns over a decade. The real risk is selling a compounder and missing the entire journey.

2. "OTHER REASONS": These are pure behavioral errors:

   • Anchoring to Purchase Price: Irrelevant to the stock's future. The market doesn't care what you paid.

   • "Surged 50%" / "Paper Profits": Reflects a scarcity mindset, treating profits as something to be "captured" rather as evidence of a working thesis. It confuses volatility with permanent loss.

   • "Sell to Buy Lower": Attempts to time the market, a famously losing game. The risk of the stock continuing upward and never returning to your buy price is high.

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Commentary & Practical Insights

Strengths:

• Discipline Framework: It provides a clear checklist to curb emotional selling.

• Emphasis on Business Quality: It keeps the investor's eyes on what matters—durable competitive advantages and capable management.

• Long-Term Orientation: It forcefully aligns the investor with the power of compounding.

Challenges & Nuances:

• Execution is Hard: The discipline requires immense patience and the ability to watch portfolios decline 30-40% without panicking, trusting the business quality.

• Valuation Still Matters (Subtly): While arguing against selling for being "overpriced," the philosophy doesn't advocate buying at any price. The "expected returns over 10 years" inherently includes a judgment on current price. A price so high that it guarantees poor returns for a decade is a valid reason not to buy, and arguably to sell if you own it.

• "Almost Never" is Extreme: Philip Fisher's quote is inspirational, but few businesses remain outstanding for 50 years. Industries disrupt, scales diseconomies emerge, and management changes. The "Changing Facts" reason is the necessary counterbalance to "almost never."

• Portfolio Concentration: This approach works best for a concentrated portfolio of high-conviction ideas. It is difficult to follow if you own 50 stocks, as you cannot know each business well enough to judge "changing facts."

Conclusion

This guide is a masterclass in investor psychology and business-focused investing. It's not a trading manual; it's an ownership manual. Its greatest value is inverting the typical investor's mindset: instead of asking "Should I take profits?" it forces the questions "Is the business still great?" and "Do I need the capital for something more pressing?"

For the individual investor, adopting this framework means:

1. Doing deep research before buying (so you have a "fact base" to judge later).

2. Developing the fortitude to ignore short-term price volatility.

3. Having a systematic process to periodically review business fundamentals—not stock charts.

It’s a simple, but not easy, path to long-term wealth creation.

"Do not panic when shares experience short-term movements"

 

The principle of "Do not panic when shares experience short-term movements" is the practical application of discipline and long-term focus. It separates successful, patient investors from those who allow emotion and market noise to dictate their decisions.

Here is an elaboration on why this principle is vital and how short-term volatility relates to long-term returns.

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1. Volatility is Normal and Inevitable

• Volatility Defined: The day-to-day (or even minute-to-minute) fluctuation in stock prices is called volatility. It is a natural and permanent feature of the stock market.

• The Big Picture: As a long-term investor, your gains come from the fundamental growth of the businesses you own over many years, not the transient mood swings of the market. Historically, despite numerous financial crises, wars, and recessions, the broad stock market (like the S&P 500) has trended upward over multi-year and decade-long periods.

• The Math of Time: Research consistently shows that the probability of achieving a positive return in the stock market dramatically increases the longer you hold your investment. Over very long horizons (e.g., 15 to 20 years), the probability of generating positive returns has historically been extremely high, regardless of when you initially invested.

2. The Dangers of Panic Selling

The primary risk of panicking over short-term movements is locking in permanent losses and missing out on the recovery.

• Selling at the Bottom: Panicked investors sell out of fear when the market is low. They convert a paper loss (a decline in value) into a realized, permanent loss (a loss of capital).

• Missing the Best Days: Studies show that a disproportionately large share of the market’s gains occur during just a few of its best-performing days. These days often occur immediately after sharp downturns. If you sell out of panic, you are highly likely to miss the beginning of the rebound, severely hindering your long-term returns.

• The Wrong Focus: Panicking means you have shifted your focus from the quality of your investment (the company's earnings, business model, and future prospects) to the short-term ticker price, which is often disconnected from the underlying business value.

3. Profiting from Short-Term Volatility

Legendary long-term investors like Warren Buffett view market volatility not as a threat, but as an opportunity created by the panic of others.

• The "Sale" Sign: If your research confirms that a company is high-quality, well-managed, and has intact fundamentals, then a temporary market decline merely puts that stock "on sale."

• Averaging Down: A disciplined, non-panicked investor can use market dips as an opportunity to buy more shares of high-conviction winners at a discounted price, effectively lowering their overall average cost per share. This enhances future returns when the market inevitably recovers.

• Time Horizon as an Advantage: Day traders need volatility to make gains, but for the long-term investor (with a horizon of 10+ years), volatility offers the chance to buy, while the long-term trend of business earnings drives the ultimate gains.

4. How to Apply the Principle

To avoid panic, you must have a clear strategy and confidence:

• Investigate the Cause: When a stock drops, do not panic sell immediately. Instead, pause and ask: Is the drop due to a market-wide event (e.g., interest rate hike, geopolitical news) or a company-specific fundamental breakdown (e.g., failed product, debt crisis)? If it's a market-wide event, the stock is likely a bargain.

• Be Confident in Quality: Your protection against panic is the thorough research you conducted before buying the stock. If your analysis of the company's merit remains strong, you should remain confident and stay invested.

Maths of Crisis Investing. Aim for extraordinary wealth building. Must be prepared.

How to deploy your cash during a crisis?

One mistake I've seen investors make is going all in too early.  They see prices fall 20% and think they've found the bottom. They deploy all their cash. Then prices fall another 30% and they have nothing left to buy at the truly bargain levels. 

The solution is to scale into positions gradually. Don't try to call the exact bottom. Nobody can do that consistently. 

Instead, plan to deploy cash in trenches as prices fall. For example, 

• you might deploy 10% of your cash when prices fall 20% from the peak. 
• another 15% when prices fall, 30%, 
• another 20% when prices fall, 40%, and so on. 

This approach ensures that you're buying more at lower prices. 

If prices keep falling, you have cash left to take advantage. If prices reverse, you've already established positions that will benefit from the recovery.

I followed this approach in 2008 and 2009. I started buying when the crisis began, but reserved most of my capital for later. As prices fell further, I deployed more. By the time we reached the bottom, I had made significant investments but still had powder left for opportunities that emerged in the following months. 

What to buy first?

Another consideration is what to buy first. During a crisis, almost everything goes on sale. Stocks, bonds, real estate, private businesses. You can't buy everything. You have to prioritize. 

My priority is always quality first. I'd rather buy a great business at a good price than a mediocre business at a great price. The great business will recover and compound for decades. The mediocre business might never recover or might recover slowly and then stagnate. 

So I start by looking at the best businesses, the ones with the strongest competitive positions, the most capable managements, the most resilient business models. If those businesses are available at attractive prices, that's where I deploy capital first. 

Only after I've invested in the highest quality opportunities do I consider lower quality businesses that might offer higher potential returns, but also higher risk. These can work out spectacularly. But they can also fail entirely. I size these positions smaller and only pursue them after the core portfolio is established.

https://www.youtube.com/watch?v=Xv9TV-dI7z4

Warren Buffett: Why 2026 Will Be the Best Buying Opportunity Since 2009

Summary of Investment Strategy During a Crisis

The article outlines a disciplined approach to deploying cash during a market downturn, emphasizing patience, gradual investment, and a focus on quality. Key points include:

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1. Avoid Going “All In” Too Early

• Common Mistake: Investors often use all their cash after an initial market drop (e.g., 20%), leaving them unable to capitalize on deeper declines.

• Solution: Scale into positions gradually as prices fall, rather than trying to time the exact bottom. This ensures capital is preserved for true bargain levels.

2. Deploy Cash in Trenches

• Example Strategy:

  • 10% of cash deployed after a 20% decline from peak.

  • 15% more after a 30% decline.

  • 20% more after a 40% decline, etc.

• Benefits:

  • Buys more at lower prices if the downturn continues.

  • Maintains “dry powder” for future opportunities.

  • If markets recover early, positions are already established to benefit.

3. Prioritize Quality Investments

• Focus on Quality First: Invest in high-quality businesses with strong competitive positions, capable management, and resilient models, even if the price is only “good” rather than “great.”

• Rationale: Quality businesses are more likely to recover and compound value over decades.

• Higher-Risk Opportunities: Consider lower-quality, higher-potential investments only after building a core portfolio of quality assets, and size these positions smaller.

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Discussion

The article provides a pragmatic, risk-managed framework for crisis investing. Its core principles—gradual deployment and quality-first selection—reflect lessons from historical crises like 2008–2009. By avoiding impulsive, all-in bets, investors can reduce regret and remain agile. The emphasis on business fundamentals over sheer cheapness aligns with long-term value investing philosophy, where durability matters more than short-term price movements. This approach balances opportunity capture with psychological discipline, making it suitable for investors seeking to navigate volatility systematically.

The most important determinants of your success in investing

 The most important determinants of your success in investing are QMV:

QUALITY - the quality of the company you own,

MANAGEMENT - the integrity of its management, and

VALUE - the price you paid for your stock.

This QMV framework is a powerful and timeless distillation of what truly matters in investing. It moves beyond the noise of daily price movements and macroeconomic forecasts to focus on the few variables an investor can actually control and assess.

Let's elaborate and comment on each component.

1. QUALITY - The Foundation of the Enterprise

Elaboration:
"Quality" refers to the fundamental strength and durability of the business itself. It's not about a hot stock tip or a trending sector, but about the company's inherent characteristics. A high-quality company typically possesses:

• A Durable Competitive Advantage (Moat): This is the key. It's what protects the company from competitors and allows it to earn high returns on capital over the long term. This moat can come from:

  • Brand Power (e.g., Coca-Cola): The ability to charge a premium.

  • Intellectual Property (e.g., Pfizer): Patents that block competition.

  • Network Effects (e.g., Visa): The service becomes more valuable as more people use it.

  • Cost Advantages (e.g., Amazon): Scale that allows for lower prices that competitors can't match.

  • High Switching Costs (e.g., Adobe): It's too difficult or expensive for customers to leave.

• Strong Financials: Consistent and growing revenue, high profit margins, high returns on invested capital (ROIC), and a strong balance sheet (low debt).

• Resilient Business Model: The company's products or services are in constant or growing demand, making it resistant to economic downturns (recession-resistant).

Commentary:
Investing in a quality company is like building a house on solid bedrock. Even if you overpay slightly (a Value misstep), the company's ability to grow earnings over time can bail you out. A low-quality company, however, is like building on sand. Even if you buy it at a seemingly cheap price, it can be eroded by competition, debt, or obsolescence. Quality is your first and most important line of defense.

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2. MANAGEMENT - The Stewards of Your Capital

Elaboration:
When you buy a stock, you are entrusting your capital to the company's leadership. Their integrity and talent are paramount. Key traits of excellent management include:

• Capital Allocation Skills: This is arguably their most important job. How do they reinvest the company's profits? Do they make smart acquisitions, invest in R&D, pay down debt, or return cash to shareholders via dividends and buybacks? Poor capital allocation can destroy value even in a good business.

• Skin in the Game: Do the CEO and executives own a significant amount of stock? Ownership aligns their interests with shareholders. They benefit when you benefit.

• Transparency and Candor: Do they communicate clearly and honestly with shareholders, admitting mistakes and laying out a clear strategy? Or do they hide bad news and use corporate jargon to obscure the truth?

• A Long-Term Orientation: Do they resist the pressure to manage for quarterly earnings at the expense of the company's long-term health?

Commentary:
You can find the highest-quality company in the world, but if management is incompetent, self-serving, or fraudulent, the investment is likely to fail. A great management team can often improve a good business, while a poor one can run a great business into the ground. Management is the human engine that either multiplies or squanders the value of the quality asset.

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3. VALUE - The Price You Pay Determines Your Return

Elaboration:
This is the discipline of investing. Value is not about the absolute stock price, but the price you pay relative to the intrinsic value of the business. Paying a fair or, better yet, a discounted price for a wonderful business is the goal. Assessing value involves:

• Valuation Metrics: Using tools like the Price-to-Earnings (P/E) ratio, Price-to-Free-Cash-Flow, and Discounted Cash Flow (DCF) analysis to estimate what the business is truly worth.

• Margin of Safety: A concept popularized by Benjamin Graham. This is the practice of buying a stock at a significant discount to its calculated intrinsic value. This buffer protects you if your analysis is slightly wrong or if unforeseen problems arise.

• Patience: Waiting for the right price often means doing nothing for long periods. The market periodically offers opportunities to buy great companies at good prices during periods of panic, sector-wide sell-offs, or temporary company-specific issues.

Commentary:
Paying too high a price for even the best company can lead to years of poor returns. The dot-com bubble is a classic example of investors ignoring value altogether. A great company bought at a euphoric price can stagnate for a decade as its earnings slowly "grow into" its inflated valuation. Value is the discipline that provides the payoff; it transforms a good business into a great investment.

The Synergy of QMV: The Three-Legged Stool

The true power of QMV is that the three elements are not independent; they are deeply interconnected and form a synergistic whole. Think of it as a three-legged stool—if one leg is broken, the stool collapses.

• Quality + Value: Buying a wonderful company at a fair price (Warren Buffett's classic approach). This is the sweet spot for long-term wealth creation.

• Quality + Management: A great business with a stellar management team is a gem. You might be willing to pay a slightly higher price for this combination because you trust the stewards to increase the intrinsic value over time.

• Value without Quality or Management: This is the "value trap"—a seemingly cheap company that is cheap for a reason (dying industry, bad management). The price never recovers because the business itself is eroding.

Conclusion:

The QMV framework is a robust antidote to the speculation and short-termism that often dominate financial media. It forces the investor to focus on what is knowable and important: the nature of the business, the people running it, and the price paid.

By rigorously searching for high-quality businesses run by capable and honest management that you can buy at a discount to their intrinsic value, you dramatically increase your odds of achieving lasting success in the market. It is a philosophy of business ownership, not just stock trading.

Two major schools of investing: Quality Investing and Value Investing.

 Quality versus Net asset value bargains

Quality: Price today $12. Price in 5 years? Net asset value bargains: price today is $12 and its intrinsic value should be $18. Is it always better to buy compounders? Is it always better to buy growth? If you are buying an asset because it is cheap, is your upside limited? Is buying cheap assets the name of the game? Must you always focus on cheap assets? You should look for both: good and cheap. The greater the margin of safety the higher the potential return. Always demand a huge margin of safety.

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This is an excellent set of statements that gets to the very heart of the debate between two major schools of investing: Quality Investing and Value Investing.

Let's break down, analyze, and expand on each point, culminating in a critical opinion.

Analysis & Expansion of the Statements

1. "Quality versus Net asset value bargains"

• Quality (The Compounder): The statement "Price today $12. Price in 5 years?" is the essence of investing in quality compounders. The focus is not on a static intrinsic value, but on the company's ability to grow its intrinsic value over time. You are betting on the company's durable competitive advantages (moat), excellent management, high returns on capital, and its ability to reinvest earnings at high rates of return. The future price is a function of this growth. If earnings per share double, the share price is likely to follow.

• Net Asset Value (NAV) Bargains (The Cigar Butt): This is classic Ben Graham-style deep value investing. The company may be mediocre, but it's selling for significantly less than its liquidation value or a conservative estimate of its current assets. The premise is that the market is irrationally pessimistic, and eventually, the price will converge to its intrinsic value. The upside is the gap between $12 and $18. This strategy often involves assets that are "one puff" stocks—you buy them cheap, they revert to mean, and you sell.

2. "Is it always better to buy compounders? Is it always better to buy growth?"

• The Allure: It seems obvious. Who wouldn't want to own a business that becomes more valuable every year? In theory, yes, it's better.

• The Critical Reality:

  • The Price Problem: The biggest risk with compounders and growth stocks is overpaying. A wonderful company bought at a ridiculous price becomes a bad investment. If you overpay for growth, you can experience years of poor returns even as the company executes perfectly (see many tech stocks in the early 2000s).

  • The Prediction Problem: Identifying a true long-term compounder in advance is incredibly difficult. Industries change, moats erode, and today's superstar can be tomorrow's dinosaur. The "growth" you see might be cyclical, not secular.

  • The Impatience Problem: The market can be irrational in the short term. Even a genuine compounder can stagnate for years before its value is recognized, testing an investor's conviction.

3. "If you are buying an asset because it is cheap, is your upside limited? Is buying cheap assets the name of the game? Must you always focus on cheap assets?"

• The "Cigar Butt" Limitation: Yes, the upside in a pure net asset value bargain is theoretically capped. Once the price reaches intrinsic value ($18 in the example), the reason for holding the stock disappears. You've captured the margin of safety. This is what Charlie Munger called the "cigar butt" approach—one or two puffs of profit, and then you have to find another.

• Is it the "Name of the Game"? For pure deep-value investors, yes. Their entire philosophy is built on buying dollars for fifty cents, repeatedly.

• The "Value Trap" Danger: The critical risk of only focusing on cheap assets is the value trap. A stock is cheap for a reason—its business may be in permanent decline. Its assets may be eroding, or its earnings may be disappearing. The "cheap" price can get even cheaper if the intrinsic value falls faster than the price. You have a margin of safety on the balance sheet, but no safety from a deteriorating business.

4. The Synthesis: "You should look for both: good and cheap. The greater the margin of safety the higher the potential return. Always demand a huge margin of safety."

This is the evolved, modern view of value investing, heavily championed by Warren Buffett after his influence from Charlie Munger.

• "Good and Cheap" (The "It's-Fat-Pitch" Investing): This is the holy grail. It means finding a high-quality business with a durable competitive advantage, trading at a price that provides a margin of safety. You are not just buying a cheap asset; you are buying a growing stream of future cash flows at a discounted price.

• Margin of Safety Redefined: For a compounder, the margin of safety isn't just the gap between price and current assets. It's the gap between the price you pay and your conservative estimate of the company's future intrinsic value. A "huge margin of safety" protects you from:

  1. Errors in your analysis (you were wrong about the quality).

  2. Unexpected bad luck (industry disruption, recession).

  3. The inherent unpredictability of the future.

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Critical Opinion

The progression of these statements mirrors the evolution of smart capital from rigid dogma to a more pragmatic, synthesized philosophy.

1. The Duality is False, but the Tension is Real: Pitting "Quality" against "NAV Bargains" as a strict either/or is a false dichotomy. The most successful long-term investors seek to unite them. They want to buy a wonderful business at a fair or bargain price. The real tension is in the trade-offs: How much quality are you willing to sacrifice for a deeper discount? How much of a premium are you willing to pay for superior quality?

2. "Always" is a Dangerous Word in Investing: The statements "Is it always better..." and "Must you always focus..." are traps. The market is a dynamic ecosystem. There are periods when growth stocks are wildly overvalued and deep value is the only rational choice. There are other periods when the economy is so disruptive that the few true compounders are the only assets that can thrive. A rigid strategy that ignores market context is fragile.

3. The Superior Framework: The final synthesis—"look for both good and cheap"—is the most robust framework. It acknowledges that what you buy (the business quality) is ultimately more important than what you pay for it, but it crucially adds that what you pay determines your return. Paying too much for quality can lead to mediocre returns, while buying a poor business because it's cheap can lead to permanent capital loss.

4. Margin of Safety is the Bedrock: The concluding emphasis on a "huge margin of safety" is the non-negotiable element that ties it all together. It is the principle that manages risk and acknowledges the limits of human foresight. Whether you're valuing a stagnant net-asset bargain or a high-flying compounder, demanding a significant discount to your calculated intrinsic value is the single most important discipline an investor can have.

Conclusion:

The initial statements chart a path from a simplistic, binary view of investing to a sophisticated, nuanced one. The optimal strategy is not to choose between Quality and Value, but to seek the intersection of both, guided always by the discipline of a Margin of Safety. This approach avoids the value traps of cheapness-alone and the capital destruction of overpaying for growth. It is the difference between being a mere "trader of cigar butts" and being a "business owner" for the long term.

Can quality be more important than price?

Paying too much for a share can result in disappointing returns. No company, no matter how good, is a buy at any price.

Share valuation is not an exact science.  Your valuation will never be exactly right, but by setting yourself some limits, you can reduce the risks that come from overpaying for shares.

However, there is some evidence to suggest that paying what might seem to be a moderately expensive price (slightly more than the suggested maximum) for a quality business can still pay off in the long run.   The caveat here is that you have to be prepared to own shares for a very long time.  Perhaps forever.

The way people invest is changing. 

Many people are not building a portfolio of shares during their working lives to cash in when they retire.  An increasing number will have a portfolio that may remain invested for the rest of their lives.  For them, a portfolio of high-quality shares of durable companies may help provide them with a comfortable standard of living, with the initial price paid for the shares not being too big a consideration.

Shares of high-quality businesses are scarce

We have to remember that the shares of high-quality businesses are scarce.  This scarcity has a value and might mean that investors undervalue the long-term value of them.

The ability of high-quality companies to earn high returns on capital for a long time can create fabulous wealth for their shareholders.  This is essentially how investors such as Warren Buffett have built their fortune.

Can quality be more important than price?  YES!

High-quality companies with high and stable returns on capital have created substantial wealth over the decades.  

Few if any of the shares could have been bought for really cheap prices.   

In many of the cases, the enduring quality and continued growth of the company could be seen to have been more important than the initial price paid for them.

How can you begin to own a portfolio of quality companies?

Settling on Quality

There is no scientific way of finding the perfect combination off price and quality.

• Should we pay dearly for high quality?
• And anything for moderate quality?
• Obviously, paying little for quality would be ideal, but practically impossible.  

Uncovering real gems at an attractive price.  Over time, you will find the right balance.



A good set of businesses at an attractive price.

For example, your portfolio may have

• an average ROCE (the companies forming the portfolio) of over 40%, 
• with a free cash flow yield of over 10%  

How can you reach this point of owning a portfolio of quality companies?

You have to progressively sell off stocks that did not meet the new philosophy and to only buy those meeting the quality requirements.

It will be slow work, requiring you to sell off cheap companies (gruesome companies) and to fight against your attachment to them.

You have to be convinced that this is the right way to go and you go all in.




Searching for quality is not about blindly following formulas.

While these are a good starting point, they remove the essential human element which is of such importance to some investors.

It is not enough to find a high ROCE and low P/E ratio.

You have to understand where the profits are coming from and above all, where they are headed. This is essential and you need to spend most of your time doing this.

The possible purchase price can be readily found in the daily newspaper or in real time online, but analysing a specific sector and the company's competitive position is what enables you to determine the intrinsic value, which is neither as obvious nor as easy to identify.

This is the great enigma of investment and you have to begin deciphering it.

Shift to Quality

Graham was too focused on price at the expense of quality.  Of course, this is an oversimplification.   Graham also took account of other factors, such as growth or stable results, although he didn't put as much emphasis on them.  

Most investors today pay attention to other drivers, such as growth or business quality, assigning increasing weight to them over time.



Philip Fisher

Philip Fisher played a pivotal role in the transformation undergone by many investors.  It was under the influence of his partner, Charlie Munger, that Buffett first became attracted to Fisher's philosophy.

Fisher put his money on investing in long-term growth stocks, with very robust competitive advantages that were capable of being sustained and increased over time.  The price paid for them was not as important, since if the company performed well it would be able to sustain a high multiple.  

This idea is less intuitive and therefore harder to digest than simply buying something cheap; it means paying seemingly expensive prices for something that will only yield results after a period of time.

This is ultimately the road that Buffett has gone down.  Thus, most value investors are also indirectly indebted to Fisher to some degree or another.

For those who have maintained a certain unshakeable bias towards investing in cheap assets, whose quality was not always proven, it can be a challenge to change their ways, especially when this mix had produced good results.

Every investor develops at their own pace.  



Joel Greenblatt

Joel Greenblatt's short book, The Little Book That Beats the Market, gives empirical proof that quality shares bought at a good price will always outperform other stocks.  

To do so, he classifies each stock according to two criteria: 

• quality, measured by ROCE (return on capital employed) and 
• price, measured by the inverse P/E ratio (price to earnings, the price that we pay for each unit of earnings).  [You can also use FCF yield, that is, FCF/price, instead of inverse P/E].

Greenblatt uses a numerical classification for both return and price:  1, 2, 3,4,...., with 1 being the stock with the highest ROCE under the return criteria and 1 being the highest free cash flow under the price criteria.   He then adds the points obtained by each share in both rankings to produce a definitive classification, which he calls the 'magic formula'.  

• The companies with the lowest sum of both factors deliver the best long-term returns.  
• Furthermore, the same is true throughout the ranking; companies situated in the lowest 10% post a better return than the second 10%, the second decile outperforms the third, and so on until the last 10%.

The exceptional results obtained by Greenblatt is surprising, but logical:  good companies bought at reasonable prices should obtain better returns on the markets.

The problem with applying this approach is that the formulas deliver over the long term, but they can also underperform for relatively long periods, for example, three years  this makes it though for both professional and enthusiast investors to keep faith when things are not working.