Course Module 102: The Quality Value Investing Model
How to invest in the winning stocks of enduring enterprises
Summary
The critical importance of screening for quality, enduring companies.
Only buy shares when the stock is available at a temporary discount.
Why and how to equal weight the holdings in your portfolio.
Practice patience in holding for the long term, including forever.
The ten stocks held in the QVI Combined Portfolio for over six years beat the S&P 500 by a resounding +15,932 bps average per holding.
QVI Course Module 101 focused on picking the winning stocks of enduring enterprises. Course Module 102 examines how to invest in those potentially profitable common stocks by constructing a retail portfolio that resembles a collection of owned slices of well-managed companies producing in-demand high-quality products or services with durable competitive advantages.
Here is how alpha happens when investing in the shares of wonderful companies at value prices over enduring periods instead of the shortsightedness of trading in and out of faceless stocks.
Course Module 102 Syllabus
Subject matter objective: How to invest in the winning stocks of durable enterprises.
Screen for Quality, Enduring Companies
Wall Street lives and dies by its quarterly earnings releases.
Instead, screen and research quality businesses for mispriced value.
High-quality companies offer the best opportunities to outperform the market on the downside.
Buy Shares When Available at a Discount
An attractive stock price becomes a non-negotiable prerequisite to initiating the productive partial ownership of excellent businesses.
Holding a concentrated basket of the common shares of high-quality companies increases the potential to produce superior returns.
Practice discipline and patience to keep sifting for value regularly; the occasional surprise bargain appears when least expected.
Equal Weight the Portfolio Holdings
By equal-weighting a portfolio, each component is treated equally regardless of price, market cap, or investor sentiment.
There is no need to overweight by speculating on what holdings will outperform the targeted benchmark.
Ultimately, equal weighting a portfolio increases the likelihood of outperformance by limiting conscious and subconscious bias.
Hold for the Long Term, Including Forever
Buying and holding the common stocks of quality companies at sensible prices remains the most straightforward path to investing success.
When buying enduring companies at reasonable prices, there are fewer incentives to sell other than to take profits on a long-held common stock to fund life’s significant milestones.
Buy low, hold high, and sell when you die.
65% Will Likely Outperform Over Time
Uncomplicated, focused research has significant potential to outperform the market over an extended holding period.
By following Quality Value Investing’s principles and strategies, 65% or two out of three holdings in the QVI Portfolios outperformed or matched the broader market since 2009, as of the market close on February 15, 2023.
It is undisputed that concentrated portfolios of select quality plus value compounders are the best opportunity for success in long-term, do-it-yourself common stock investing.
Screen for Quality, Enduring Companies
Quality Value Investing aims to create value for subscribers by centering on how to screen, research, and select potential ownership slices of publicly traded companies offering enduring legacies to stakeholders, inclusive of customers, employees, vendors, suppliers, regulators, the community at large, and present or future shareholders.
Wall Street lives and dies by its quarterly earnings releases and the fanfare preceding and following each report. However, forecasting future stock prices, market movements, revenue growth, or earnings per share with consistent accuracy is arbitrary, even for senior management of a company. Never attempt to predict in detail what will happen with the stock market or any particular business. Instead, screen, research, and monitor quality businesses for mispriced value. Strive to study and learn in the short term while saving and investing for the long term.
The lesson involves owning slices of excellent companies instead of trading speculative instruments. This course module attempts to answer why and how putting quality before speculation is the more profitable approach to retail investing.
Course Module 101 offered a model to screen for the bargain-priced shares of companies with strong value propositions, favorable earnings, free cash flow, and dividend yields—as compared to the Ten-Year Treasury rate—adequate returns on equity and invested capital; attractive prices to sales, operating cash flow, and enterprise value to operating earnings; and controllable long- and short-term debt coverage.
A higher potential for market-beating performance exists when a company and its common shares are superior in each screening indicator. Quantify the performance of the operation in more objective than subjective terms. No-brainers are better bets than possibly’s or maybes.
Instead of chasing the dragon, own common shares to savor the benefit of partnering with a company supporting its customers with in-demand, useful products or services, rewarding employees with sustainable career opportunities, and compensating shareholders with positive returns protected by world-class internal financial controls.
High-quality companies offer the best opportunities for portfolios to outperform the market on the downside, with a lesser percentage drop than benchmark index averages. Senior executives of varying qualities will come and go when least expected. Therefore, stick with companies that hold enduring value, regardless of who is in charge.
Seek companies with overall attractive long-term prospects; knowing the high-quality business model of the operator remains paramount to the success of the investment over time.
Stop making bets on faceless stocks and start investing in great companies.
Buy Shares Only When Discounted
Any stock surviving the screener becomes a candidate for additional research and potential real-time purchase or active inclusion in a portfolio.
The stock screen used to construct the QVI Portfolios favors the protocols of finding value from wide safety margins, then profiting from stock price and dividend compounding driven by high returns on capital allocations.
For value-based investors, an attractive stock price becomes a non-negotiable prerequisite to initiating the productive partial ownership of companies with high-quality business models. And the preservation of capital becomes supreme following the stock purchase.
Patient everyday stock investors know if they wait long enough, their targeted quality companies—including some already in their portfolio and now trading at higher valuations since initial purchase—become available at bargain prices, if only temporarily. Consequently, investors or traders who lack patience often pay more for the equities purchased. Why pay more?
Investors, who hold a concentrated basket of the common shares of high-quality companies, and follow it with diligence, have an increased potential to produce superior returns over the long term. On the contrary, they lose more often than win by trading in and out of stocks based on news, quarterly results, or market sentiment.
Frustrating as it is, owned equities held in a portfolio or targeted common shares on a watchlist more often appear at fair value or overvalued to investors focused on owning the mispriced stocks of enduring companies over long-term holding periods. Practice discipline and patience to keep sifting for value regularly; the occasional surprise bargain appears when least expected. In other words, buy the common shares of a targeted, high-quality business when the market turns against it, thereby generating a bargain price point.
Remember, value-based common stock investing is the equivalent of finding the proverbial needle in a haystack and, therefore, requires large doses of discipline and patience for long-term success. First, wait for the valuation multiple of the shares of an enduring enterprise to drop to levels signaling a temporary bargain. Just as discounted prices on NIKE (NYSE: NKE) athletic wear appear rarely, so do fair prices on NIKE common stock. Therefore, savvy investors keep their eyes open to avoid blinking and missing those excellent yet fleeting buying opportunities.
Conscientious investors never wish for macro or microeconomic events that affect jobs and portfolios negatively. But, when one occurs, the available dry powder gets allocated to the discounted stock prices of quality companies that often ensue. One cannot change history, just one’s reaction to it. Stick to the basic tenet of the value-based investor’s search for alpha by focusing on the attractiveness of a stock based on valuation metrics relative to the underlying fundamentals of the business.
Elude the prediction game of specific future margins and cash flows; instead, find great companies trading at reasonable prices from diligent research and analysis of the current wealth and present value. Remember, in the stock-picking vehicles of thoughtful, disciplined, and patient investors, the rearview and side-view mirrors are clear, and the windshield is foggy. So they invest with due diligence based on looking in the rear and side views and deploying common sense and instinct instead of looking forward into the unknown through the windshield or a crystal ball.
Ultimately, the question becomes, “Is this a company we’d invest in if owned as a private enterprise by a trusted colleague who asked us to become a silent partner?”
Remember, concentrated portfolios of select quality compounders purchased at reasonable prices are the best opportunity for success in long-term, do-it-yourself common stock investing.
Equal Weight the Portfolio Holdings
Years of investing experience and market observations whittle down to cultivating an equal-weighted basket of the common shares of quality companies purchased at bargain prices and held for an extended duration with the objective of a majority of the stocks outperforming the market. So, how is alpha accomplished?
Let’s dig further after reading the required disclosures.
Disclosure: I/we have a beneficial long position in the shares of NKE through direct stock ownership.
I wrote this article myself, and it expresses my own 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: David J. Waldron’s Quality Value Investing course modules, newsletter posts, research reports, and model portfolios are 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 his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.