There’s an old saying in business: quality is remembered long after price is forgotten. This quote is frequently attributed to Aldo Gucci, the founder of the Italian fashion company, but it had been a business maxim long before he was around. It presents an aspect of marketplace wisdom that still rings true: people will often forget how much they paid, the how a product performs is in their face all the time.
The same can be said of stocks. How much you pay for a stock matters. It matters a lot. Getting in at the top of a market, during the enthusiasm and mania can depress your returns for years to come. But the quality of the stocks you buy matters more. If a company is on its way to liquidation, no entry price is low enough.
Conversely, high quality can overcome a bad entry point. A lot of great companies have stumbled over the years: Coca-Cola, Johnson & Johnson, IBM. In these cases, the strength of the firm’s management team and the resources it can draw upon allowed these firms to put their troubles behind them and resume growing.
But how do you measure quality without begging the question—assuming the answer as you formulate the problem? I look at three elements: management, financial, and marketplace quality. These factors aren’t foolproof, but they can give you a sense of how resilient a firm will be when it faces challenges.
Because adversity reveals character. And character is destiny.
Douglas R. Tengdin, CFA
Chief Investment Officer