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When I sell, and the two clocks
The Quality Series · part 12 of 13 The first clock: the business, and the valuation the market places on it There are mainly two reasons I sell a stock. The first is that the thesis is broken: the characteristics that made it a world-class business in the first place are gone. The warning signs…
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A temporary dislocation, or a permanent impairment?
The Quality Series · part 11 of 13 The best entry points come when a great business stumbles. The hardest judgement is whether the stumble is temporary or permanent. Nobody has a crystal ball, so this is a judgement, and I will sometimes get it wrong. The primary question I ask myself is whether the…
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Am I overpaying?
The Quality Series · part 10 of 13 “Buy world-class businesses. Don’t overpay. Let compounding do the work.” That, in one line, is what I do. Most of this series so far has been about the first part. This one is about the second, and in my experience, it is the part most likely to…
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What I won’t own
The Quality Series · part 9 of 13 The only risk that really matters to me is that the business erodes its “quality” and stops compounding. Every facet I look for in a world-class business, everything in the first eight parts of this series, is a defence against that one risk. While I am by…
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Three engines, and the people driving them
The Quality Series · part 8 of 13 Free cash flow per share can compound in three ways. The first is to grow the cash flow itself. This is the classic compounder — a durable moat, high returns on capital, real pricing power — allowing it to compound earnings and cash flow per share at…
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A moat is the power to raise prices
The Quality Series · part 7 of 13 Everyone talks about moats. In practice I use a simple test: can the business increase prices without losing the customer — and hold or grow its market share while it does? That is what a moat means to me. Brand, network, switching costs, patents — they matter…
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Why return on capital decides it
The Quality Series · part 6 of 13 Munger made a point I have never been able to improve on. If a business earns 6% on its capital over forty years and you hold it for forty years, you will not do much better than 6%, even if you bought it cheaply. If it earns…
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The secret sauce
The Quality Series · part 5 of 13 If I had to name the single most important factor behind long-term outperformance, it would be what Buffett called economic goodwill — to me, the primary measure of a business’s capital efficiency. I first wrote about it in 2016, and it has been the cornerstone of how…
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Where stock returns actually come from
The Quality Series · part 4 of 13 The return from owning a share comes from the growth in free cash flow per share, from a change in the multiple the market is willing to pay for that cash flow, or from a combination of the two. That is all. Everything else — the narrative,…
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From great business to great investment
The Quality Series · part 3 of 13 Why does linearity matter? Because it is the first link in a chain. A great business and a great investment are not the same thing, and the journey from one to the other has five links. I think about them in this order. Linearity. A world-class business…
Quality · Macro · Philosophy