A New Year's Resolution for Quality-Driven Investors
Stop trading stocks and start investing in companies by understanding the difference and its positive impact on a retail portfolio
Stop betting on stocks and start investing in companies.
Rational investors contribute to themselves, their families, and society by owning the common shares of businesses supporting quality and compliance in an unpredictable world.
Disciplined investors prefer companies that are already growing, discounting growth promises from analysts, bloggers, podcasters, or senior management.
Patient everyday stock investors often benefit from future growth by buying value today.
Stop Trading Stocks | Start Buying Companies
The founding concept of buying and selling stocks facilitated willing participants in taking affordable ownership slices of publicly traded companies.
However, the original premise has evolved beyond the fundamentals-driven ownership of common shares to include various research methodologies, ownership classifications, and trading platforms.
Nonetheless, the tradition of seeking companies with attractive long-term prospects should continue, as the operator’s enduring quality remains paramount to the investment’s success.
This QVI post addresses the intrinsic advantages of investing in slices of quality companies, guided by current wealth and present value, instead of placing bets on faceless stocks for speculative growth.
Trade a Cigar Butt or Invest in a Bottle of Wine
The so-called cigar butts special situation—the common shares of fair companies available at cheap prices—is more about trading stocks and practicing arbitrage than about investing in companies and is speculative.
On the other hand, equate the endurance of a quality enterprise to a long-lasting bottle of fine wine. The analogy is reminiscent of Warren Buffett of Berkshire Hathaway’s ($BRK.B) acknowledgment—influenced by his partner Charlie Munger—that he transformed from a stock trader to a company owner.1
Munger’s wisdom confirms that investors who diligently follow a concentrated basket of common shares from high-quality companies have an increased potential to produce superior returns over the long term. On the contrary, investors are more likely to lose than to win when trading in and out of stocks based on news, quarterly results, or market sentiment.
Get to Know the Business
Infamous stock picker Peter Lynch writes in his must-read book, *Beating the Street*:
Behind every stock is a company. Find out what it’s doing.2 —Peter Lynch
Lynch clearly illustrates the distinction between the enduring wealth of a company’s products or services and the fleeting value of its recent earnings releases and stock prices.
I am neither savvy nor foolish enough to time the market. Instead, I search for a margin of safety in five critical quantitative and qualitative areas of a targeted business’s operational and equity performance, as presented in QVI’s newsletter posts and books.
Successful, do-it-yourself investors target historically profitable, cash-generating companies with comfortable safety margins. In addition, disciplined investors own companies with efficient, transparent management that leverages customer, employee, and shareholder returns.
They think of themselves as investors who own slices of excellent businesses instead of accumulating electronic shares of common stock purchased instantly from their online discount brokers. The actions may be identical, although the affirmation of company ownership is more substantial than simply trading stocks.
After all, a bottle of fine wine lasts far longer than a cigar butt.
Invest in Current Wealth and Present Value
The choice isn’t really between value and growth but between value today and value tomorrow. Growth investing represents a bet on company performance that may or may not materialize in the future, while value investing is based primarily on the analysis of a company’s current wealth.3 —Howard Marks
This section opens with a thoughtful quote from the legendary value investor, money manager, and author Howard Marks in his essential book on risk management, *The Most Important Thing.*
Marks’s wisdom challenges a skeptical approach to modern measurement methods that momentum investors and day traders use, such as technical analysis or the in-depth study of past price behavior. Defensive investors prefer companies that are already growing, discounting analysts, financial bloggers, and senior management’s customary growth promises.
Like Howard Marks, intelligent investors focus on quality-driven value investing in their equity analyses, which are grounded in fundamentals. This serves as another reminder that present value often leads to future growth.
How Value Begets Growth
When conducting due diligence for an investment portfolio, consider evaluating at least three years of trailing growth in revenue, earnings per share, and dividend rates.
Look for double-digit or at least favorable compounded annual growth rates (CAGR). The potential for annualized compounding from total return on capital and dividends improves when purchasing common shares with wide safety margins or at a price believed to be below the estimated intrinsic value of the representative underlying stock. QVI’s newsletter posts, course modules, and books explore these strategies in depth.
With a nod of gratitude to Howard Marks’s timeless wisdom, avoid attempts at equity analysis that claim XYZ Shares Undervalued by 27 Percent. Rational, disciplined, and patient retail investors disavow any self-illusion about their ability to predict exact percentages of presumed pricing discrepancies. Instead, they conclude from research and common sense that a stock appears mispriced in a general sense.
If such prognostication were more often correct—being wrong the more frequent outcome—then the so-called top one percent of wealth would grow closer to perhaps 50 percent of the population by buying and selling based on the magical price predictions. Until, of course, the zero-sum game of investing rears its head.
Speculative growth stocks tend to fall harder and faster in down markets than they rise in up markets. Again, by buying value now, investors are better positioned to benefit from growth later.
Resolve to Stop Trading Stocks and Instead Invest in Quality Businesses
The lesson is that triumphant do-it-yourself investors research and analyze companies to own. Stock trading becomes a mere support vehicle for the primary objective of ownership.
Therefore, the best advice for investors—myself included—who lack the rare DNA of successful fast-money traders is to stop placing bets on speculative equities and start investing in quality businesses when their shares are trading at value prices.
Premium subscribers can share their investing experiences, including lessons learned and suggested antidotes, in the comments or chat below.
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Substack Finance, Seeking Alpha, MSN Money, TalkMarkets, ValueWalk, Yahoo Finance, QAV—Australia’s #1 Value Investing Podcast, Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Capital Employed, Amazon, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David previously enjoyed a 25-year career as a postsecondary education executive. He received a Bachelor of Science in Business Studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
Preview David’s Most Recently Published Book
Interested readers can preview Build Wealth with Common Stocks on Substack. In the book, David offers principles, strategies, and practices that apply rational thought, discipline, patience, emotional intelligence, and common sense to quality-driven value investing. At the end of the preview are more book recommendations for quality-driven value investors written by esteemed authors held in high regard.
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Disclosure: Our family portfolio has a long, beneficial position in common shares of BRK.B. I wrote this post myself, expressing my opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Quality Value Investing (QVI) is an educational platform for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond the QVI Real-Time Stock Picks, which are presented solely for educational purposes. David J. Waldron is an individual investor and author, not an investment adviser. Subscribers should always engage in their research or due diligence and consider, as appropriate, consulting a fee-only certified financial planner, a licensed discount broker/dealer, a flat fee registered investment adviser, a certified public accountant, or a specialized attorney before making any investment, income tax, or estate planning decisions.
Becoming Warren Buffett, directed by Peter Kunhardt (New York: Kunhardt Films, HBO Documentary Films, 2017).
Peter Lynch and John Rothchild, Beating the Street (New York: Simon & Schuster, 1993, 1994), 305.
Howard Marks, The Most Important Thing (New York: Columbia University Press, 2011), 19–20, original quote published in Marks’ memo to clients of Oaktree Capital Management, L.P.: “The Happy Medium,” July 21, 2004.