I have been investing in the stock market for over 20 years. This time, I have tried various styles such as small-cap stocks and dividend investing.
But over the past few years, I’ve primarily pursued an approach known as “quality” investing, a style that tends to produce superior returns over the long term. I wish I had known about this investment style 20 years ago.
High-quality investment structure
Quality investing is essentially a relatively simple strategy. The goal is simply to invest in high quality businesses at reasonable valuations.
Of course, the word “high quality” means different things to different people. However, we generally refer to companies that:
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Has a wide “economic moat” (meaning competitors cannot easily steal market share)
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Has a strong track record of growth and returns to investors
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has attractive future growth prospects
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very profitable
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generate a lot of cash
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Strong balance sheet (low debt)
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Less cyclical (meaning the next recession won’t reduce profits)
A good example of a high-quality company is a software company microsoft (This is currently one of my largest holdings). It meets all of its criteria. Let’s take a look at its performance over the past 10 years. Since I bought it in 2019, the price has increased from $150 to $400.
strong long-term returns
Now, as I mentioned earlier, quality investments have been shown to pay off tremendously in the long run. For example, since its inception in 1994, the MSCI World Quality Index has had an annual return of 11.9%, compared to the typical annualized return of his MSCI World Index of 8.3%.
Terry Smith, on the other hand, takes a rigorous quality approach. Fundsmith Equity Since the fund’s inception in 2010, it has returned approximately 15.4% annually.
And Warren Buffett is also a major proponent of a quality investing style. Since 1965, he has earned about 20% annually.
I would like to point out that this style does not always work. There may be times when performance degrades. (e.g. when cyclical stocks like miners are surging). However, overall I find this to be a very effective approach.
A high quality British company
The good news for UK investors like me is that the UK is full of high quality companies. london stock exchange.
One example is a real estate website. move right (LSE: RMV).
With a well-known brand and a wide economic moat, the company has an excellent track record of growth.
Profitability is also very high. For example, its return on capital employed (ROCE) over the past five years has averaged an impressive 285%, making it one of the most profitable companies in his FTSE 100.
However, its business model tends to insulate it from the ups and downs of the UK property market.
Of course, there is no guarantee that the stock price will provide attractive returns in the future. There’s always the potential for new technology or new competitors to disrupt the growth story.
But overall I think it’s a great stock for the long term. That’s how we built up a certain position.
At its current valuation (about 20x P/E), I think it has the potential to deliver attractive long-term returns.
The post I wish I had known about this lucrative style of stock market investing 20 years ago appeared first on The Motley Fool UK.
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Edward Sheldon holds positions at London Stock Exchange Group Plc, Microsoft, Rightmove Plc and Fundsmith Equity. The Motley Fool UK recommends Microsoft and his Rightmove Plc. The views expressed on the companies mentioned in this article are those of the writer and may differ from official recommendations we make on subscription services such as Share Advisor, Hidden Winners, or Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.
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