This paper intends to provide an in-depth perspective on high-quality investing:
- There is a long tradition of investing in “quality” companies, however there is debate regarding how to define “quality”. We provide our perspective as long-term investors.
- The “science” of financial statement analysis is useful for identifying aspects of quality. However, traditional academic finance and “quant” investors typically fail to account for the long-term orientation of fiduciaries, and in general are backward-looking rather than predictive.
- We review well-known quantitative measures specifically with regard to persistence over the long term, and relevance for asset owners and actual practitioners of long-term investing.
- In addition, we review a range of qualitative and cultural quality measures, and identify effective complements to traditional financial statement measures.
- Finally, we propose and illustrate that the use of a combination of art and science—forward-looking and backward-looking, qualitative and quantitative analysis—is critical to identifying companies likely to sustain high quality attributes over the long term.