The Quality Value Investing Model | Part 2 of 2
Quality-driven value investors achieve alpha buying low, holding high, and selling when they die
Summary:
A profitable retail common stock portfolio resembles slices of well-managed companies with enduring competitive advantages.
Achieve alpha by investing in wonderful companies held over time instead of trading faceless stocks.
Building a concentrated basket of reasonable-priced shares of high-quality businesses increases the potential for superior returns.
This two-part post examines how the profitable retail common stock portfolio resembles a collection of owned slices of well-managed companies producing in-demand high-quality products or services with enduring competitive advantages.
Alpha happens when investing in wonderful companies over enduring periods instead of the shortsightedness of trading in and out of faceless stocks.
Review of Part 1 of 2
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 has an increased potential to produce superior returns.
Practice discipline and patience to keep sifting for value regularly as the occasional surprise bargain appears when least expected.
Equal Weight the Portfolio Holdings to Prevent Bias
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 success as an individual retail investor. Moreover, equities interpreted as buy-and-hold candidates often present with below-average or low downside risk profiles.
The pursuit of alpha equates to building a portfolio of common stocks of excellent businesses, outperforming the corresponding benchmark over time and exceeding any other expectations of disciplined, long-view investors. Notwithstanding any attractive buying or profit-taking opportunities, the current market cycle—bull, bear, or range-bound*—is irrelevant to buy-and-hold quality value investing.
(*Bull: the market is rising, and the economy is sound. Bear is an economy that is receding, and most stocks are declining. Range-bound: having prices constrained between certain upper and lower limits.)
Suppose you buy a great company at a favorable price, and the enterprise’s value proposition remains intact. Then, why sell other than to fund new opportunities or finance an upcoming milestone in life with the proceeds?
Unlike trading, selling is more challenging than buying when practicing buy-and-hold, value-driven common stock investing. However, selling or reducing does make sense when raising capital or expediting the occasional divestiture of an underperforming holding that was a good idea at the time of purchase.
When buying enduring outstanding companies at reasonable prices, there are fewer incentives to sell other than to take profits on a long-held common stock to finance college tuition, a wedding, a home purchase, a business start-up, or retirement. Therefore, your approach to investing in common stocks must be cognitive.
If modeling Warren Buffett’s career that resolved to buy and hold terrific companies at fair prices, the independent investor would stay for the long haul, as the holding period where Buffett’s fortune began to compound into the billions was not until his age 60’s decade.
Buy low, hold high, and sell when you die.
Equate the premise of buy-and-hold-forever as a commitment to businesses—and the common stocks representing each—to buy low, hold high, and sell when you die. In other words, be willing to hold the common shares of great companies for a generation, enjoying the magic of compounding growth in capital and dividends. Selling when we die translates to passing the asset on to our heirs, as the information thus far is vague on whether stocks are trading in any afterlife.
Equating stock ownership to partnering with the board and employees of the company to provide customers with in-demand products or services from a premise of fundamentals and valuation remains an enduring, profitable, and satisfying way to invest.
While on the journey, relish the experience of owning slices of excellent companies that contribute to socio-economic opportunities for your family, country, and the world. Borrowing from the medieval French poem about the patience required to develop the ancient city of Rome, no one builds a life-changing portfolio in a day.
Over 60% Will Likely Outperform Over Time
Self-directed common stock investing is simple, although never easy; doable, albeit intimidating. However, uncomplicated, focused research conducted with rational thought, discipline, and patience has more significant potential to outperform the market over an extended holding period.
The total return of 11 of 18 or more than 60% of the holdings in the QVI Concentrated and Expanded Stock Picks held longer than five years have outperformed the S&P 500 during the same holding periods, adjusted for splits and dividends. Moreover, the same 18 picks have collectively outperformed the S&P 500 Index by an average of 15,900 basis points [bps] per holding on an equal-weighted basis adjusted for dividends since inception.
Suppose we stick to the stocks of quality companies purchased at value prices. In that case, the chances are excellent that the winners will outnumber the losers over time, such as the legacy holdings of the QVI Real-Time Stock Picks.
Successful retail common stock investing underscores market-beating potential over a long-term holding period instead of next week, next month, or a year from now, thus affirming the benefits of the longer-view investment paradigm.
Investors who give up on underperforming stocks held fewer than five years forego the potential for a sizable market outperformance after several years of compounding. The QVI Real-Time Stock Picks have demonstrated the time-tested investment platform of buy-and-hold value investing is alive, well, and here to stay.
Achieve alpha by outperforming the S&P 500 over time by filtering the noise on Wall Street and avoiding the current risk-heavy high flyers or trading schemes. The good news is that such market-wide irrational behavior creates profitable buying opportunities, if only temporarily, and provides the potential to succeed over time. In the short term, the crowd is almost always wrong. Outperform the market long-term by becoming an informed investor.
By keeping investment research focused on a few crucial metrics combined with a pinch of common sense, quality-driven value investors can trounce overly sophisticated deep-dive predictive analysis and achieve alpha with lower costs and less risk despite capital limitations.
Focusing on the fundamentals that matter without regard to the institutional pressures of fast-money-seeking clients and quarterly out-of-the-park performance, rational, disciplined, and patient investors increase the likelihood of market-beating returns.
Alpha Happens on the Downside
Although a trading day, week, month, or quarter never defines a market sample size, market outperformance often occurs on the downside.
A portfolio built on the quality-driven value investing model that underperforms the market when flying high tends to outperform the market on the downswings. The math equates to the total returns of the quality value portfolio exceeding the market over an extended holding period.
Remember, the best opportunity to win in the long run is to beat the market on those down days, weeks, months, or entire bear markets.
Investors are often surprised by the holdings outperforming and underperforming in a portfolio during an extended holding period. We never know until we do, although, after the fact, everything appears with a 20/20 vision.
It is undisputed that concentrated portfolios of select quality compounders purchased at reasonable prices are the best opportunities for success in long-term, do-it-yourself common stock investing.
