Quality stock or investment is very subjective and relative.
Traditional Quality definition is
- Earning Growth over period of time : Industry structure and future environment
- Certainty of earning: : Ability to differentiate
- Management Value system - to share earning and be fair and transparent to all stake holders
Consumer tastes , regulation, technology , country competitive context changes often impact industry structure and hence the firm that is operating in that industry context . This often leads to shift of good quality business to bad business and vice versa . These changes impact Moat and hence ability to generate Cash
Also Management changes and strategies can also destroy Moat or burn cash and hence need to be continously studied and evaluated .
The passive investment theory that Quality stocks will keep compounding on account of Moat is a fad that has been spread by so called Value investors to such a extent that people are ready to pay any PE multiple for these stocks .
All stock are quality investment at right prices
Business that have rational competitors and favorable industry structure can enjoy PE equivalent to their growth ( ie if company earning is growing at 18% YOY , one Year forward PE should 18 -20 Max ) . Any such Quality business being sold at PE higher than PEG = 1 , needs to be bought with care and should be continously assessed YOY to see if earning power is getting diluted or strengthened .
Also One may read Ben Graham Intelligent Investor wherein he tells again and again to be weary of so called Quality Business which may not be neccessary be Quality Investment .
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