Which is more important: price or quality?
Photo: Victor Hanacek. Source: Picjumbo
Ideally, you’d like to have both. But there’s an old saying in business: quality is remembered long after the price is forgotten. This quote is frequently attributed to Aldo Gucci, the founder of the Italian fashion company, but it had been a marketplace maxim long before he was around. It presents a bit of business common sense: people often forget how much they paid, but how a product performs is in their face all the time.
The same is true with stocks. How much you pay matters. It matters a lot. Getting in at the top of a market, during enthusiasm and mania can depress your returns for years to come. But the quality of what you buy matters more. If a firm is on its way to bankruptcy, no entry price is low enough. There was never a good time to buy Enron, Worldcom, or Lehman.
But a high-quality company can overcome a bad entry point. A lot of great firms have stumbled over the years: Coca-Cola, Johnson & Johnson, Microsoft. In each case, the strength of their management team and their resources allowed them to work through their troubles and resume growing.
But how do we measure quality? I look at three things: management strength, financial performance, and the actual products they sell. Analysts often seem to ignore that if someone sells junk to their customers, eventually those customers stop buying their products.
These factors aren’t foolproof, but they give us a sense of how resilient a firm will be when hard times come. Because if you can buy good quality at an attractive price, that’s real value.
Douglas R. Tengdin, CFA