According to Buffett’s Alpha, Warren Buffett’s outperformance has been generated by investing in cheap, safe, quality stocks. So how do investors trying to follow the same strategy define “quality”?
One way to define a quality stock is to look for attributes of the business that set it apart from competitors, and allow the business to sustain through the ups and downs of the economic cycle. High quality stocks are profitable, provide predictable stable cash flows and make investments of capital to set the stage for further growth opportunities.
Each of these traits is attractive in its own right, but combined, they are the proverbial goose that lays the golden egg, enabling a continued cycle of cash generation, which can be reinvested, begetting more cash, which can be reinvested again or returned to shareholders.