A thought came to me as I was looking through my portfolio companies. An often overlooked factor in investments is the company culture. Most investors take a quantitative approach to their investments. There’s nothing wrong with such a method of valuation, but for long term investors, paying a higher price for quality might pay off in the long run.
To give an analogy, and a Warren Buffett one in fact. Imagine you are trying to buy a gift for your girlfriend. You have 2 choices, a unpolished diamond, or a used brinestone. Both are undervalued but of course the unpolished diamond is still relatively more expensive. Which will you choose? Of course you will choose the unpolished diamond. It’s hard to imagine a scenario where your girlfriend will be happy with a brinestone regardless of what you do with it.
Relating this to investments, it is critical, even as we look out for under valued companies, that we identify the diamonds among the brinestones. These are the companies that will produce long term outperformance.
So what are examples of quality?
- Passionate management team
- Strong cost orientation
- Cost efficiency
- Meritocratic structure
- Lean structure
- Performance driven
- Ownership mentality
Some of my favourite groups of companies include those affiliated to John Malone, 3G Capital and Berkshire Hathaway.