8 Key Lessons from the Intelligent Quality Growth Investor
"The Intelligent Quality Investor" is a great introductory book to the world of investing in high-quality companies. What to look for and how to evaluate them.
These are the 8 key lessons I pulled from the book.
Lesson 1
The 4 key attributes to pay attention to when evaluating a potential investment are growth, capital allocation, pricing power, and valuation. Maximizing your portfolio for these attributes can increase your long-term compounding rate.
Lesson 2
Companies with high returns on capital and free cash flow margins are preferred.
Now, only a small number of sectors can maintain high margins and high returns. You want to identify the right industries and companies to invest in.
McKinsey has a table showing the common industries and sectors where high returns on invested capital are more common.
Lesson 3
Screening for linear or exponential share price growth over long time periods allows us to locate the companies that have incrementally increased their share price over long time periods. This can help you identify companies that have a good track record of growth.
Lesson 4
Duopolies often enjoy high barriers to entry. As an investor, you can treat duopolies as a monopoly by buying both for your portfolio.
Like Visa and Mastercard.
or S&P Global and Moody’s.
Lesson 5
The best metric for evaluating growth is free cash flow per share. Studies have shown that companies that convert a high percentage of their earnings into FCF outperform companies that convert a low percentage of earnings into FCF.
Lesson 6
A consistently high FCF margin sustained over a long time period is the best indicator that a company has pricing power. And an increasing margin over time indicates that a company's pricing power is strengthening.
Lesson 7
It's important to be aware of whether stock-based compensation is included in the FCF calculation and to subtract it where necessary. This will ensure that you're making like-for-like comparisons when evaluating different companies.
Lesson 8
Don't interrupt compounding unnecessarily. Invest in companies that have high free cash flow per share, high returns on capital, high margins, and an attractive free cash flow yield and get out of their way.