When considering potential investments for our strategies, we prize quality above all. Quality may seem like a vague term, but to us and in the world of investing, it means something very specific. It’s a 360-degree investment approach that takes into account both quantitative and qualitative factors.
Sure, algorithms can run the numbers on revenue, P/E ratio, profit growth, etc. But they tend to struggle when it comes to assessing factors like management credibility, brand loyalty, and company trajectory.
We believe that taking into account qualitative – or “soft” – data, along with the hard numbers gives us an advantage when it comes to discovering the companies that have the most wealth-building potential for our clients.
The Four Pillars of Quality
Every holding is rigorously vetted by us against these standards. If we believe a potential investment does not measure up, we don’t invest. Period.
Pillar of Quality #1: Management, Culture, and Incentives
In our view, great companies make great investments. And great companies start with visionary leadership. We look for management teams that can not only articulate their strategies, but rally their entire organizations around executing them. They cultivate a culture filled with smart, motivated employees, and incentivize them to do ground-breaking work.
When management and employees are personally invested, whether financially, emotionally, or — preferably — both, businesses should be poised to thrive.
Pillar of Quality #2: Economics
Of course, all the passion and devotion in the world can’t overcome the basic rules of supply and demand. Quarter-over-quarter and year-over-year, we want to see growing revenue, increasing profits, and a business model that should support and scale them well into the future. Preferably, every extra dollar of revenue contributes more to the bottom line than the last. We look at traditional factors like cost structure, revenue models, and capital efficiency, along with other considerations like customer loyalty and pricing power.
We always like to see a healthy balance sheet when it comes to cash on hand and corporate debt obligations.
Pillar of Quality #3: Competitive Advantages
Next, we broaden our perspective to assess the competitive landscape in which our prospective holdings operate. Have they been a dominant player in their given sector? Or are they a promising up-and-comer and potential industry disruptor? How crowded is the space with competitors, and how does our prospective holding stack up? Competitive advantage looks different for various kinds of businesses.
We love to see a unique strategy, product, service, or business model that stands out from the competition, and which may potentially dominate the landscape for years to come.
Pillar of Quality #4: Trajectory
Our final pillar involves looking forward and assessing the potential of each business. We love fast-growing companies, but is that growth sustainable? What are the keys to growth, and how might shifting consumer tastes, regulatory trends, and the competitive landscape affect their potential? Can the company scale its business model and keep its culture intact as it does so?
We like to see growing companies within expanding industries. These companies take a bigger and bigger slice of the pie within their sector, all while the sector itself continues to grow.