(MEMO) Memo - Focus On Quality

By: Wilson

I think there's a reason why Warren Buffett went from buying net-nets (companies trading below liquidation value) to buying high-quality companies at a reasonable price. The more I look at my investment picks in the past and the returns they've generated, I can't help but realize that many of the names that were "cheap for a reason" almost always required a "timing" element versus the higher quality companies.

Higher quality companies possess the ability to grow themselves into their valuation and more, while there's an arbitrary ceiling for companies that are "cheap" by nature.

Take the oil and gas business for example, quality is defined by 1) management team, 2) resources, and 3) operational capabilities. Ideally, the best situation is to have a company like Suncor where there are resources and operational capabilities but lack the management team needed to get it done. In instances like this, an activist like Elliot Management can influence substantial change in a short time.