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

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