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Lawrence Cunningham

Quality Investing

Summary

In our view, 3 characteristics indicate quality. These are strong, predictable cash generation; sustainably high returns on capital; and attractive growth opportunities. Each of these financial traits is attractive in its own right, but combined, they are particularly powerful, enabling a virtuous circle of cash generation, which can be reinvested at high rates of return, begetting more cash, which can be reinvested again.

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Key Takeaways

  1. One of our favorite explanations of quality appears in Zen and the Art of Motorcycle Maintenance, in which Phaedrus tells his student "...even though Quality cannot be defined, you know Quality is!"
  2. The value any business creates, listed or not, is determined by the rate at which it deploys incremental capital
  3. The very best companies enjoy a diversified set of growth drivers through ingenuity in the design of products, pricing, and product mix
  4. Security by obscurity - an obscure industry, even one with appealing economic characteristics, tends to face lower disruption risk, making attractive industry structures more durable
  5. Assurance benefits are often based on reputation. A reputation of high quality or reliability is earned over time. To compete with reputation is almost impossible, no matter how much money is staked on it
  6. Some key characteristics or industries of quality companies
    1. Recurring revenue
    2. Friendly middlemen
    3. Toll roads
    4. Low-price plus
    5. Pricing Power
    6. Brand strength
    7. Innovation dominance
    8. Forward integrators
    9. Market share gainers
    10. Global capabilities and leadership
    11. Corporate culture

What I got out of it

  1. A good look at a dozen or so companies and how they can be defined as "quality"

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