Pieter Slegers (Compounding Quality): The Art of Quality Investing: How to Invest in the Best Companies in the World
Jun 24, 2024
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Pieter Slegers, writer of Compounding Quality, discusses the art of quality investing, emphasizing simplicity, understanding business models, and the importance of growth and pricing power. He shares quantitative criteria for evaluating companies, portfolio construction tips, and the significance of management's capital allocation skills.
Quality investing involves choosing the best companies with reinvestment opportunities and pricing power.
Management's capital allocation skills and alignment of incentives are crucial in quality investing.
Pricing power is essential for long-term business success, allowing companies to raise prices without losing customers.
Deep dives
Investing in Simplicity and Quality
Choosing straightforward and rational investment approaches, focusing on simplicity, and staying within one's circle of competence are crucial in investing. Peter Lynch's advice to explain your investment ideas simply reinforces the importance of understanding and keeping investments simple to avoid potential mistakes.
Understanding Quality Investing and Business Models
Quality investing involves investing in the best companies with reinvestment opportunities and pricing power. Holding quality stocks for the long term requires patience and attention to growth and pricing power, which are vital for sustained success. Management's capital allocation skills and incentives alignment are key factors to consider in quality investing.
The Importance of Pricing Power in Business Success
Pricing power plays a critical role in long-term business success by allowing companies to raise prices without losing customers. Companies with pricing power can experience steady revenue growth and improved profitability, making them more resilient to inflation and market volatility. Sustainable and high gross margins are indicators of companies with strong pricing power.
Returns and Capital Allocation Strategies
Return on invested capital (ROIC) and growth are fundamental considerations in capital allocation strategies. Companies with higher ROIC may focus more on growth opportunities, while those with lower ROIC should prioritize increasing ROIC. Analyzing the balance between growth and ROIC helps in optimizing capital allocation and maximizing long-term returns.
Importance of Long-Term Thinking in Investing
Investing in businesses with a long-term perspective can lead to significant value creation over time. The focus on businesses that plan for the future, commit to innovative projects, and aim for strategic growth opportunities sets a strong foundation for potential success. By aligning the visions of clients, investors, and businesses towards long-term goals, the possibility of identifying quality investment opportunities that yield substantial returns is enhanced.
Strategic Portfolio Construction Based on Quality Investing Principles
Portfolio construction in investing involves considering various qualitative and quantitative criteria to build a robust investment strategy. Emphasizing the importance of management quality, such as skin in the game and effective capital allocation skills, is crucial for sustainable success. Utilizing a set of 15 steps to evaluate companies can help determine appropriate portfolio allocation. Additionally, adopting a diversified approach akin to assembling a strategic team, with defensive, neutral, and offensive components, contributes to a balanced and resilient investment portfolio.
My guest today is Pieter Slegers. He is the writer behind the widely popular newsletter Compounding Quality. He lives in Belgium, and used to work for a Belgian Asset Manager. His hobbies are running (he ran his first marathon last year), lifting weights and reading books. Pieter is a co-author with Luc Kroeze of a recently published book The Art of Quality Investing: How to Invest in the Best Companies in the World. It’s Pieter’s second appearance on the show, I highly recommend looking up his earlier episode.
We talk about the importance of simplicity and understanding the business model in quality investing. My guest discusses how quality companies with reinvestment opportunities and pricing power are the most favorable investments. Pieter shares that holding quality stocks for long periods requires patience. We also talk about how growth and pricing power are crucial factors in the long-term success of businesses.
My guest emphasizes that investors should focus on the journey and the potential for long-term returns. We discuss that management's capital allocation skills and alignment of incentives are important factors to consider.
Pieter shares quantitative criteria for evaluating companies, such as a healthy balance sheet, high free cash flow conversion, and attractive growth. We talk about portfolio construction, including position sizing and knowing when to sell stocks. Stay tuned until the end to hear my guest share what we should focus on considering quality investing.
05:00 Introduction and Meeting the Co-Author
14:13 The Importance of Simplicity and Understanding
20:08 The Global Opportunity and Diversification
30:20 The Importance of Growth in Quality Investing
36:33 The Significance of Pricing Power
51:19 The Significance of Management in the Investment Process
01:02:43 Quantitative Criteria for Evaluating Companies
01:06:52 Portfolio Construction and Position Sizing
01:19:58 The Principles and Strategies of Quality Investing
Podcast Program – Disclosure Statement
Blue Infinitas Capital, LLC is a registered investment adviser and the opinions expressed by the Firm’s employees and podcast guests on this show are their own and do not reflect the opinions of Blue Infinitas Capital, LLC. All statements and opinions expressed are based upon information considered reliable although it should not be relied upon as such. Any statements or opinions are subject to change without notice.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed.
Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for any individual. Listeners are encouraged to seek advice from a qualified tax, legal, or investment adviser to determine whether any information presented may be suitable for their specific situation. Past performance is not indicative of future performance.
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