At Intelligent Capitalworks, we believe that the key to long-term investment success is being a discriminating buyer and a patient owner of great businesses ‒ in other words, investing in high-quality companies at a fair price and owning them a long time.
We didn’t invent this bit of wisdom ‒ it’s been applied by many successful investors, including Warren Buffet. The good news is, the approach that works for Warren (and countless non-famous investors) can be put to use by any serious investor.
What Does Investing in High-Quality Companies Mean?
So let’s first look at what investing in high-quality companies means. A great investment is a business that has demonstrated revenue growth over long periods of time (more than one business cycle) and that competes on a value proposition other than price.
Why screen out businesses that can only sustain long-term revenue growth by competing on price? Because cutting prices eats into profit margins, and ultimately makes such businesses more cyclical and less attractive.
The key to uncovering businesses with real long-term growth is to look for cash flow growth generated from continuing operations over multiple business cycles.
Businesses that are able to grow throughout the business cycle and maintain solid profit margins are likely selling something that is needed rather than wanted, and they have a defensible value proposition or competitive advantage.
When business conditions deteriorate and the economy contracts, people naturally trim the “wants” from their spending in order to get what they “need.” Companies that provide those “needs” are more likely to maintain their share of household, business and government budgets and demonstrate more stable profit margins throughout the business cycle.
Businesses that have demonstrated a capacity to generate rising cash flow and stable profit margins from continuing operations throughout business cycles should be considered as potentially attractive businesses that you may want to own for a long time.
The next step is to dig in and do research. That means looking forward to analyze the prospects for businesses to continue to grow and maintain their profit margins. Analyzing the long-term cash flows businesses may be able to generate allows investors to develop frameworks for fair prices to pay to receive those future cash flows. And that helps us to decide price levels at which price we would be attracted to investing in high-quality companies.
Deliberately buying great businesses and owning them a long time ‒ investing in high-quality companies ‒ is how we believe intelligent capital works.
Warren Buffet's Approach to Investing in High-Quality Companies
We believe three bits of advice from Warren Buffett support this view and will serve you well:
1. Prefer to own a great business at a fair price rather than a fair business at a great price.
2. Own businesses you’d be comfortable to hold if the market shut down for 10 years and you couldn’t get a price
3. If the fundamentals remain intact, “forever” should be your favorite holding period.
To learn more about investing in high-quality companies, click here to download our proprietary research paper, Deliberate Dividend-Growth Investing for Rising Income and Capital Growth.
If investing in high-quality companies ‒ as we’ve defined them above ‒ managed for the long term makes good sense to you, we may be able to help.