Track 04Module 2 of 611 sources
Quality, moats and the capital cycle
Tell a durable compounder from a temporarily profitable business, and use the capital cycle to time sectors.
Key ideas
- Most stocks do worse than Treasury bills over their lives. A small minority of long-lived compounders create nearly all net wealth.
- High return on capital that persists needs a barrier: brand, network, cost or regulation. Without one, competition takes the returns away.
- The capital cycle: high returns attract investment, new supply arrives, returns fall. Buy sectors where capital is leaving.
- Quality is a measurable factor. Profitable, stable, low-leverage firms have earned a premium, and investors still tend to underpay for them.
Start hereWatch or read these first. They carry the core idea.
Paper
Do stocks outperform Treasury bills?
Bessembinder · 2018 · Journal of Financial Economics · doi:10.1016/j.jfineco.2018.06.004
The paper that showed a few percent of stocks account for all net wealth creation. Changes how you think about stock picking.
QGLP - Mantra of Wealth Creation - By Mr. Raamdeo Agrawal
Video · Motilal Oswal Asset Management · 38:20
Quality, growth, longevity and price, the framework behind one of India's long-running wealth creation studies.
CoreThe standard references. Work through them once the idea is clear.
Consistent Compounders Webinar - Why investors should focus on free cashflows
Video · Marcellus Investment Managers · 1:27:38
Why free cash flow and return on capital identify Indian compounders.
Book
The Unusual Billionaires
Saurabh Mukherjea
Case studies of Indian companies that compounded for decades, and what they had in common.
Book
Book
Common Stocks and Uncommon Profits
Philip A. Fisher
The original guide to qualitative research on a business.
Paper
Quality minus junk
Asness, Frazzini, Pedersen · 2018 · Review of Accounting Studies · doi:10.1007/s11142-018-9470-2
Defines quality precisely and shows it earns a premium across countries.
Paper
Buffett’s Alpha
Frazzini, Kabiller, Pedersen · 2018 · Financial Analysts Journal · doi:10.2469/faj.v74.n4.3
Explains the Berkshire record as cheap, safe, quality stocks plus low-cost leverage.
Report
Wealth Creation Studies (Raamdeo Agrawal)
Motilal Oswal
Thirty years of annual studies on Indian wealth creators.
Raamdeo Agrawal on Building Wealth, QGLP Strategy & $1M Investing | Sonia Shenoy Podcast
Video · Sonia Shenoy · 1:11:04
A longer interview on the same framework.
Go deeperResearch, primary sources and data for when you want the detail.
Newsletter
Practice
Screen for Indian companies with return on capital above 20 percent for ten years and low debt. Pick one and write down what stops a competitor from copying it.
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Where this leads
04.4 · Investing and ValuationReading filings and catching bad accountingRead an annual report efficiently and recognise the common ways earnings are flattered.04.3 · Investing and ValuationFactors: value, momentum, quality and low riskKnow the handful of return patterns with real evidence, how they behave in India, and why they sometimes fail for years.