Warren Buffett, arguably the most famous “value investor”, recently discussed high quality stocks.
In a letter to shareholders, he explained how Charlie Munger taught him the true meaning of value:
“More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price. Despite the compelling logic of his position, I have sometimes reverted to my old habit of bargain-hunting, with results ranging from tolerable to terrible. Fortunately, my mistakes have usually occurred when I made smaller purchases. Our large acquisitions have generally worked out well and, in a few cases, more than well.”
This lesson is confirmed by Jason Zweig, who recently wrote a good column in the Wall Street Journal:
“Research can be published soon in the prestigious Journal of Financial Economics by Robert Novy-Marx, a finance professor at the University of Rochester, shows that bargain priced “quality” stocks outperformed the overall market by more than four percentage points annually between 1963 and 2011. This stunning margin is even higher than that earned over the same period traditionally measured cheap “value” stocks, but usually with less severe losses in market downturns. Quality also tends to do well when value does poorly, and vice versa.”