Quality investing

from Wikipedia, the free encyclopedia

Quality investing is an investment strategy that is based on the identification of investment objects with above-average quality characteristics.

The idea of ​​quality investing comes from the world of bonds and real estate , where ratings and reports determine the quality and price of the investment object.

In the case of stocks , by means of fundamental analysis , supplemented by soft quality criteria such as the credibility of corporate management, stocks are identified that are particularly valuable and also of outstanding quality. Quality investors usually only invest in those quality stocks that have a favorable valuation on the stock market .

history

The classification of investment objects according to quality characteristics has a long tradition in bonds and real estate. Credit ratings result in a quality criterion for bonds from companies and states - investment-worthy creditworthiness stands for higher quality than speculative creditworthiness; Bonds with a speculative credit rating are also called junk bonds or junk bonds. In the case of real estate, a quality assessment is carried out by experts and so-called experts . Although not regulated by law, the quality is determined on the basis of a certain catalog of criteria and is mostly used to determine the value of the property.

Benjamin Graham , the forefather of value investing , was the first to recognize the quality problem with stocks as early as the 1930s and to differentiate between high quality and low quality stocks. He also observed that the greatest losses arise not from buying quality at too high a price, but rather from buying poor quality at apparently cheap prices .

In the business literature, the quality issue in the corporate context gained increased attention, particularly through the BCG matrix developed in 1970 . Using the two characteristics of market growth (based on the product life cycle) and market share (based on the experience curve concept), products within a company, but also companies themselves, can be divided into two quality categories (" cash cows " and "stars") and two non-quality categories ( Subdivide “Question Marks” and “Poor Dogs”) and display them in a matrix. Other important works on the business quality of companies come primarily from American management literature. These include, for example, In Search of Excellence by Thomas Peters and Robert Waterman, Built to Last by Jim Collins and Jerry Porras, and Good to Great by Jim Collins.

Quality investing has been particularly buoyant after the stock market bubble burst in 2001 and spectacular bankruptcies such as Enron , Worldcom and Parmalat . Falsified accounts and other financial frauds led to increased demand among investors for a targeted selection of quality stocks.

Identification of quality stocks

In order to identify quality shares, systematic quality investors usually use a defined catalog of criteria. This is mostly developed in-house and is continuously maintained. Selection criteria that have been proven to have an influence and explanatory content on the business success of a company can be divided into five categories:

  1. Financial strength : The financial strength of a company is checked primarily on the basis of the balance sheet and by comparing financial indicators with sector or market averages or by making a direct comparison with other companies. The numerical values ​​should not be viewed in isolation, but viewed in the overall context of the company. Particular attention should be paid to earnings , cash flows and free cash flows, and debt . The source of the income should also be examined carefully. The more income the company can generate in its core business , the better positioned it tends to be.
  2. Price potential: The quality and the favorable stock valuation are closely linked in quality investing. While a rigorous quality filter can protect the share from falling prices due to a negative corporate development, the inclusion of a favorable valuation should guarantee that the share beats the market in the medium to long term. When evaluating, it is particularly important to pay attention to discounted cash flows , the price / earnings ratio and the price / book value ratio . If you compare the determined values ​​with market averages, you get an indication of the valuation of the share.
  3. Business model: The analysis of the business model should provide information about which strategy the company uses to serve which markets with which range . The competitive advantage plays a particularly important role. The business model must be comprehensible and should be focused on the core expertise on the one hand, but sufficiently diversified on the other. The business risks and business development must be calculable and it must be possible to estimate how high the earnings potential for the business model is.
  4. Market environment: An analysis of the market environment is essential for assessing the quality of a business model. An industry analysis should be avoided. Quality companies must be able to assert themselves in a certain market and must not only stand out from a sector that may be weak . When analyzing the market environment, the potential market size and positioning of the company in this market play just as important a role as future market development and the degree of competition. It is also important which profitability can be achieved in this market and which capital intensity can be expected.
  5. Management: A company is usually only as good as the people who run it. An assessment of the management is therefore important, but also relatively difficult. Indicators of good management can be low turnover rates . Little changes, especially in the management team, are often a good sign. The management organization of a company should also be built up logically and clearly structured. A fast management rhythm, ie frequent board and supervisory board meetings, can be an indication of good communication and functioning processes. In addition, there should be good contact with the shareholders. The goodness of investor relations can provide clues about this.

Quality vs. Value and Growth

Quality investing is an investment style that can be viewed independently of value investing and growth investing. A quality portfolio can therefore contain both growth and value stocks.

Value investing nowadays is primarily based on stock valuation. Certain valuation metrics such as the price / earnings and price / book value ratio play a central role. Value is either defined via the valuation level in comparison to the overall market or the sector or as the opposite of growth. A fundamental company analysis is of secondary importance. A value investor therefore buys a company because they believe it is undervalued and it is also a good company. A quality investor buys a company because it is an excellent company and also has an attractive valuation level.

Growth investing primarily focuses on growth stocks . Experts' earnings estimates lead to earnings per share . Only stocks that are expected to have high future profits and strong growth in earnings per share are selected. The question of the share price at which these profit expectations are bought and on what fundamental basis the growth is based are secondary. Growth investors therefore primarily buy stocks with high earnings growth and high profit expectations, regardless of the valuation level. Quality investors prefer stocks that have high earnings growth built on solid fundamentals and that are reasonably priced.

swell

  1. ^ Benjamin Graham (1949). The Intelligent Investor , New York: Collins. ISBN 0-06-055566-1 .
  2. ^ P. Weckherlin, M. Hepp: Systematic Investments in Corporate Excellence , Verlag Neue Zürcher Zeitung. ISBN 3-03823-278-5 .
  3. ^ Quality as an Independent Style. Implications for Portfolio Construction (pdf). Study by Dr. Wolfram Gerdes. November 2009.