Buying Quality Is Good. Buying It At The Right Price Is Better.

Recently Elio D’Amato an Executive Director of Lincoln Indicators, Fund Managers and the creators of Stock Doctor, published an article with the title “Why Value Investing is Not Going to Make You Money.”

In it, he argues that Qual­i­ty met­rics are the most impor­tant guide to long term growth in the share mar­ket, and that he is com­fort­able pay­ing a pre­mi­um for such com­pa­nies.

Elio D’Amato argues that com­pa­nies of inter­est to “Val­ue Investors” are at the oppo­site end of the spec­trum to those of inter­est to “Qual­i­ty Investors”. This is, of course, not true, as our QAV check­list points out, you can have both. Com­pa­nies such as Qan­tas, Beach Ener­gy and Fortes­cue Met­als Group score on both met­rics of Qual­i­ty and Val­ue at the moment.

Tak­ing one with­out the oth­er leaves you exposed to either pay­ing too much for a qual­i­ty com­pa­ny or invest­ing in infe­ri­or busi­ness­es because they are cheap.

Should you pay a high price for a qual­i­ty invest­ment? In the art world, pay­ing mil­lions of dol­lars for works by The Mas­ters can be a sound invest­ment, but find­ing a paint­ing by a revered artist in a jum­ble sale is an even bet­ter result. Grant­ed this is more dif­fi­cult to achieve, but in the stock mar­ket, from time to time, com­pa­nies and sec­tors go out of favour enough that such oppor­tu­ni­ties present them­selves.

Addi­tion­al­ly, how do we know that a high price is too much, if we do not have a con­cept of the Intrin­sic Val­ue of a com­pa­ny. The basis of invest­ing is buy­ing some­thing for less than what we think it is worth. The more we pay for a piece of a com­pa­ny, the longer it will take to repay us.

Lis­ten­ers to our pod­cast will know that I have high regard for the Stock Doc­tor prod­uct and team, which is why I pay atten­tion to Elio D’Amato’s arti­cles. In this case, how­ev­er, I think there is a piece miss­ing in the puz­zle. We should pay atten­tion to qual­i­ty, but should look to buy those stocks when they rep­re­sent val­ue.

I hope you find this food for thought and we wel­come any ques­tions and com­ments and would wel­come a rep­re­sen­ta­tive from Lin­coln Indi­ca­tors to come onto our show and shed more light on the thoughts behind buy­ing Qual­i­ty at a pre­mi­um.

- Tony Kynas­ton