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Concept
Quality investing
Summary
Quality investing is an investment strategy based on a set of clearly defined fundamental criteria that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability). Quality investing supports best overall rather than best-in-class approach.
The idea for quality investing originated in the bond and real estate investing, where both the quality and price of potential investments are determined by ratings and expert attestations. Later the concept was applied to investments in enterprises in equity markets.
Benjamin Graham, the founding father of value investing, was the first to recognize the quality problem among equities back in the 1930s. Graham classified stocks as either Quality or Low Quality. He also observed that the greatest losses result not from buying quality at an excessively high price, but from buying Low Quality at a price that seems good value. Warren Buffett said that one wants to buy companies that can be run by idiots, because some day they will be.
The quality issue in a corporate context attracted particular attention in the management economics literature following the development of the BCG matrix in 1970. Using the two specific dimensions of life cycle and the experience curve concept, the matrix allocates a company's products – and even companies themselves – to one of two quality classes (Cash Cows and Stars) or two Non-quality classes (Question Marks and Dogs). Other important works on quality of corporate business can be found primarily among the US management literature. These include, for example, "In Search of Excellence" by Thomas Peters and Robert Waterman, "Competitive Advantage" by Michael Porter, " Built to Last" by Jim Collins and Jerry Porras, and "Good to Great" by Jim Collins.
and "Quality Investing" by Lawrence Cunningham
Quality investing gained credence in particular after the burst of the Dot-com bubble in 2001 when investors witnessed the spectacular failures of companies such as Enron and Worldcom.
Official source
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