Performance of Buy Good Business Approach

[cloud]

Buying Good Business with a fair price and sit on the ass is Charlie Munger Approach.  He said it's better than buy high quality business with fair price than buy low quality business with a good price.  It's very boring but simple and profitable.

 

Attached is the result of 12 high quality Canadian stocks with equal weight, it generates annual return of around 15% to 20%, beat TSX by a huge margin.

The result is amazing even one of them is a loser: WJX.  but the result is still extraordinary.

 

I am very tempted to put all investments into an equal weight portfolio with good businesses and enjoy my life but the problem is it's too boring. I like to do some trading.. If I do concentrate trading on value stocks, I might get +30% year and -10% year regularly. The result will be better but more roller coaster than equal weight approach.  Hold quality business with equal weight removing the need to guess which will be winner and which will be loser giving a smooth and satisfactory return. I do have a small portion of investable asset in equal weight sit on ass approach. It works.  The result is as expected: smooth and satisfactory, e.g. 10% to 20% per year return.  What kind of business is suitable for equal weight and sit on ass?  Examples are: Dollarama, CCL Industries Inc. Look at the performance of these two stocks. This is what quality means. Maybe it's not worth the effort to trade.  . Maybe I'll boost the equal weight portfolio in bear market..

 

Buy quality and sit on ass is simple because I don't read their annual/quarterly reports. I throw them out if they mail to me and opted for electronic delivery.  I just buy the stock and wait.  Before I decide own a stock, I look at two most important things: 1. The product and service.  2. The important numbers on the balance sheet

 

 

 

 

[james22]

Quality Minus Junk

 

http://www.econ.yale.edu/~shiller/behfin/2013_04-10/asness-frazzini-pedersen.pdf

[giofranchi]

Maybe I should clarify quality as compounders. 

 

Ok, then we should clarify what compounders mean: is L a compounder? Is JAH a compounder? Are they both compounders? If you had invested in L in 2001, you probably would have done little better than the S&P500. Instead, if you had invested in JAH in 2001, you would have increased your capital 45x. Both compounders, yet extremely different results!

 

Imo in business you cannot generalize.

 

Cheers,

 

Gio

 

[Homestead31]

This approach has some nice appeal versus buying cheap stuff but I have no idea about what the performance of this approach versus lets say the S&P 500.  The only market benchmark I know of is MOAT.  MOAT did well when it started but has been lagging recently.  Does anyone have 5-yr + performance examples of this type of approach.  Thanks.

 

Packer

 

Check out the Fundoo Professor blog if you haven't already.  he is based in India and ~20% per year for years w/ a Ben Graham and arbitrage style... a year or 2 ago he switched to a "moat" strategy of 10 or 12 stocks and had 100% returns last year.

 

this presentation in particular is very good: https://dl.dropboxusercontent.com/u/28494399/Blog%20Links/October_Quest_2013.pdf  it demonstrates the trouble the market seems to have w/ discounting very good businesses.  also google "fundoo professor, floats and moats" for a 3 part series on what he looks for..

[Homestead31]

it is also worth checking Ackman's last Sohn conference presentation.  the latter half of the presentation focuses on VRX, but the first half focuses on "platform companies" and is a useful mental model

[Guest Schwab711]

@Packer: One option is to check what your expected returns would be with 100% accuracy by selecting companies you think are "great" currently that you may have picked >10 years ago or something. From there, you can make an estimate of your batting average (and possibly weighting, but you'd just be making your results less accurate) to adjust your results. This exercise is probably only useful if you don't know the returns of the companies you pick ahead of time. As mentioned in a lot of words, most papers you'll find on the topic will likely use quantitative screens to select their samples (for good reason). Your sample will likely be blind and you may not know or agree with all the companies included. There are a few studies out there that use selected companies (such as Nifty Fifty studies in the 70's). I think a reasonable expectation for returns can be approximated by the long run operating returns of companies like P&G, JNJ, DIS, INTC, MSFT, ect (basically, the current DOW).

 

I bet you'll find ~3% outperformance (or 12%, which is ~ equal to the small cap outperformance) with a diversified long-term "quality" portfolio, depending on purchase price. 12% is the long-run return on equity for American businesses (according to a Buffett study many years ago; I'm pretty sure this is still valid). Most companies are inefficient with capital, among other reasons, and the average return for equities down to the ~8%-10% range (at least since WWII I believe; ROE/(P/B) may also lead to decent approx. of E® if book is adjusted for dividends/buybacks). I would expect quality companies (if correctly identified) to provide ~15% long-run ROE, making your expected returns ~10%-12%

[txfan2424]

I wanted to get this thread firing again b/c it is interesting. I think I disagree with how some of you have defined quality - mostly via the company examples I saw. Quality, to be sure, does not always make the best investment so this is a fun chat.

 

For example, someone suggested P&G and PEP were quality, while CAT and MTW are not. My question is how you are defining quailty in a business? What makes a good business?

 

Does growth make something a good business? Absolutely not. Any company can grow if management puts their minds to it.

High market share? Maybe. Perhaps high market share isn't necessarily a good thing. Particularly when the world around you is changing. High market share can mean high costs to exit a business line.

 

Lets go back to the examples of CAT and MTW. Both are leaders in their industry. Is construction going away? The world of contruction will be lumpy as far in the future as it has been in the past. Lumpiness doesn't mean a bad business at all though. Both companies are able to manage their business to maximize cash flow in down times and offer high quality products for the cheapest cost of ownership in the industry. That is pretty good. Each of their aggregate spend on R&D and far reaching aftermarket reach makes it unlikely (or, expensive at the very least) for someone to try and unseat them. Someone would have to be willing to accept uneconomic returns for a very long time.

 

Just a couple of my ruminations on quality.

 

[LC]

pricing power.