for Quality Stocks at Bargain Prices
Choose stocks on the basis of two rules: Quality companies earning high rates of return on capital at a bargain price.
Active management of a concentrated portfolio with quality value stocks will outperform over the long run.
Be willing to expand your investment search worldwide.
Value investing is choosing stocks that are priced below their intrinsic value.
Own companies with competitive advantages or “moats” that earn high returns on invested capital consistently and are priced below their intrinsic value.
Part Science, Part Art
Use a bottom-up investing approach. Each investment should be evaluated on whether it’s a quality business on a stand-alone basis.
Determine if there’s a high probability that each company will still exist and have durable competitive advantages 5-8 years from now. Therein lies the difficult part.
Construct a concentrated portfolio of 5-10 stocks.
Research & Analysis
Own companies with high returns on capital priced at relatively low multiples of earnings.
Look for good balance sheets: High cash, low debt preferred.
Watch for value traps. Just because a stock is cheap doesn’t mean it’s a good investment. Sometimes it makes sense to pay up for quality stocks at fair prices than low quality stocks at bargain prices.
To Wait for Opportunities
Be willing to wait on the sidelines until opportunity arrives.
Have low portfolio turnover. Aim to hold good stocks for as long as possible to let the effects of compounding returns kick in.