Value investing is another term for Quality Control

I have read plenty of Warren Buffett literature over many years.  However, last week, I noticed a quote from Warren Buffett which I had not read before and it immediately struck a chord with me.

The quote was “Many in Wall Street (a community in which quality control is not prized) will sell investors anything they will buy.”  This quote can be found in a book written by Janet C. Lowe.  It is titled Warren Buffett Speaks: Wit and Wisdom from the World’s Greatest Investor (1997).

This quote resonated with me because I realised immediately that my process of ‘picking stocks’ to buy is essentially an ongoing quality control process that assesses key economic criteria of businesses listed on the Aussie market.

To find and invest in the best stocks, I use quality control metrics where all stocks I invest in must meet or exceed these Key Performance Indicators:

  1. High profitability benchmark
  2. Strong Balance sheet (little or no debt)
  3. Good cash flow

While there are about 2,000 companies listed on the ASX, my quality control yardsticks determine that only about 100 of the best companies currently meet or exceed my key benchmarks.  That is, I will only invest in the best of the best, the top 5% of all available listed companies.  I consider this top 5% to be the safest, most reliable and most profitable businesses listed for purchase.

And, I am constantly researching new businesses to find additional stocks that meet or exceed these quality metrics.  It is fantastic when I find a new business that exceeds my benchmarks and becomes a new investment candidate.  By contrast, in discovering businesses (the majority) that don’t stack up, it is seems logical to exclude them.  To me, it does not make sense to invest in a sub-par business over that of one with superior economics.

By filling The Edge Fund portfolio with a collection of these high quality businesses at sensible prices, I think this quality control strategy is likely to outperform the broader market in the long run.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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