Quality Investing
Quality Investing is an investment strategy that is based on the identification of investment with above-average quality characteristics.
The idea of Quality Investing comes from the world of bonds and real estate, where about credit ratings and advice, the quality and the price of the investment property is determined.
In stocks, picking titles will be identified by means of fundamental analysis and active stock, the quality especially stand out for a variety of business management measures and financial indicators. Quality investors invest mostly only in those quality stocks that have a favorable rating on the stock market.
History
The classification of investment according to quality characteristics has a long tradition in bonds and real estate. Ratings make bonds of companies but also of states a statement about the borrower's creditworthiness and distinguish between the two quality classes "investment grade" and " speculative grade " - the latter being referred to as "junk". In real estate, a quality assessment by experts or so-called experts is done. Although not regulated by law, the quality is determined by a specific set of criteria and serves mostly the appraisal of the property.
Benjamin Graham, the founding father of value investing, was the first who recognized the quality problem with shares already in the 1930s and undertook a distinction between quality and low-quality stocks. From him comes the observation that the greatest losses do not arise because quality is bought at too high a price, but the fact that one acquires low quality at seemingly favorable rates.
In the economic literature the theme of quality in the corporate context became particularly through the 1970 developed BCG matrix reinforced attention. Using the two expression dimensions market growth (based on the product life cycle) and market share (based on the experience curve concept ), products can be within a company, but also the company itself, into two quality categories ( cash cows and stars ) and two non-quality categories ( Question Marks and " Poor "Dogs ) divide and present them in a matrix. Other important works on economic quality of companies are mainly from the U.S. management literature. These include, for example, In Search of Excellence by Thomas Peters and Robert Waterman, Built to Last by Jim Collins and Jerry Porras or Good to Great by Jim Collins.
Quality Investing in 2001 and spectacular failures such as Enron, Worldcom and Parmalat learn buoyancy especially after the bursting of the stock market bubble. Accounting fraud and other financial fraud among investors led to increased demand for a targeted selection of quality stocks.
Identification of Quality Shares
For the identification of quality shares, systematic quality- oriented investors usually to a defined set of criteria. This is mostly self- developed and is continuously maintained. Selection criteria that have been shown to have an influence and explanatory content on the business success of a company, can be divided into five categories:
1 financial strength: A review of the financial strength of a company is done mainly based on the assessment and comparisons of financial ratios with industry or market averages or by a direct comparison with other companies. The numerical values should not in isolation, but are seen in the overall context of the company. Particular attention should be paid to income, cash flows and free cash flows and debt. The source of income, you should take a close look. The more income the company can generate in its core business, the better it is placed tend to increase.
2 Course Potential: The quality and favorable equity valuations are closely linked to Quality Investing. While a rigorous quality filter can keep the stock partially against price slumps due to a negative corporate development, guarantees the inclusion of a reasonable valuation that the stock medium to long term hits the market. In the evaluation, it is especially true on discounted cash flows to pay the price-earnings ratio and price-to- book ratio. Comparing the calculated values with market averages obtained a feel for the valuation of the stock.
3 Business model: The analysis of the business model is to provide information as to which strategy the company which markets to which assortment served. Particularly competitive advantage plays an important role. The business model must be transparent and should on the one hand focuses on its core expertise, but his other hand sufficiently diversified. The business risks and the business must be calculated and it must be to estimate how high the income potential of the business model.
4 Market Environment: An analysis of the market environment is essential for assessing the quality of a business model. It should be apart of an industry analysis. Quality companies must be able to compete in a given market and may not protrude only from a weak possibly industry. In the analysis of the market environment, the potential market size and positioning of the company in this market plays an equally important role as the future market development and the degree of competition. It is also important to know which profitability can be achieved in this market and must be reckoned with which capital intensity.
5 Management: A company is usually just as good as the people from whom it is performed. An evaluation of the management is thus important, but also relatively difficult. Indicators of good management may be low turnover rates. Little changes, particularly in the management team, are often a good sign. The management organization of a company should also be structured logically and clearly structured. A faster implementation rate, ie frequent Executive Board and Supervisory Board meetings may be evidence of good communication and working processes. In addition, a good contact to the shareholders should be. The quality of investor relations can provide evidence.
Quality vs. Value and Growth
Quality Investing is an investment style that can be considered independently of Value Investing and Growth Investing .. A Quality Portfolio may therefore contain both growth- than value stocks.
Value Investing is based today mainly on the share valuation. Certain valuation metrics such as price -earnings and price-to- book ratio play a central role. Value is defined either by the valuation levels relative to the overall market or sector or as the opposite of growth. A fundamental company analysis is rather secondary. A value investor buys a company, therefore, because it is undervalued in his eyes and it also is a good company. A Quality - investor buys a company, because it is an excellent company and also has an attractive valuation levels.
Modern Growth Investing focuses primarily on growth stocks. Profit estimates by experts will be consulted as well as the earnings per share. Title only where high future earnings and strong growth in earnings per share to be credited, enter the portfolio of Growth investors. The question to which this share price earnings expectations to buy and at what fundamental basis based growth, it is secondary. Growth investors buy shares thus primarily with large earnings growth and high profit expectations, regardless of rating levels. Quality investors prefer securities whose earnings growth is based on a sound fundamental basis and the same time have a justified price.