Quality and growth are part of value
Weekly 51 2024
The post on Tuesday received many positive reactions—thank you for that!
There were also some valid questions raised, summarized well by a question posed by Let’s Compound on X. I think it’s worth repeating here, in case others are wondering the same:
Why have you never chosen to diversify your strategy or geography?
I often read that you find the Magnificent 7 expensive, but most of them have had their dips in the past three years. Why didn’t you capitalize on those moments? Passive flows boost their success, but why fight against the tide instead of going with the flow? Why not broaden your pool to include America and benefit from both sides?
The longer this continues, the higher the opportunity cost. At some point, it becomes irreparable. The overvaluation in the U.S. might eventually decline, likely during a recession. But if that happens, will Europe move against the tide and improve? That doesn’t seem evident either. Meanwhile, the years pass by.
My response, slightly adjusted for clarity:
It’s unfortunate I moved platforms (and well just started a year ago in English); otherwise, you could see that I used to focus more on quality.
This is also reflected in my book (in Dutch), where the “queens and rooks” in the chess ranking symbolized quality stocks.
In fact, I don’t focus exclusively on Europe but rather on developed markets I can understand. That includes the U.S. and Australia, but Japan and South Korea are harder for me to grasp.
My added focus on value and Europe stems from current valuations and my disagreement with the modern definition of “quality.”
In my view, quality isn’t just about ROIC or defining the MOAT. Many moats are less durable than investors think today. This leads to companies being classified as “quality” despite vulnerabilities to disruption.
For me, a quality company is one that earns a stable income, carries little debt, and maintains a strong competitive position. It doesn’t always have to boast high margins or return ratios; stability itself offers security. If you can buy such companies at a fair price, you’ll sleep well at night.
This modern perception of quality, diverging from how Buffett and Munger originally defined it (think of their investments in railroads), often associates me with deep value investing. That’s then equated with “junk,” even though I also hold stable, growing companies like Smartphoto, Cake Box, and Luceco.
At the same time, I own contrarian stocks like Nextensa and Bonava, which are developers with higher risks but real potential.
I’ve said before that I see Meta as a missed opportunity, especially since Luc Kroeze presented it on a silver platter. However, I didn’t find the other MAG7 stocks cheap enough in 2022.
Opportunity cost is a concern for me too.
Over the long term—20 years—I’ve outperformed the S&P, despite a strong European tilt in my portfolio. But over the past three years, there’s ground to make up. Whether I can catch up this time is uncertain, though I strongly believe in my approach.
What I do know is that a portfolio of 25 carefully selected companies at 8x PE will outperform 500 companies at 30x PE over the next 3–5 years.
On X, it may seem like I overlook quality because I resist the current hype. Statements like “Amazon is undervalued at a PE of 49.5” make me nervous. When I ask for the basis—growth expectations or assumed margins—there’s usually no answer.
The same applies to ETFs and passive investing, where recent history is often uncritically extrapolated into the future. This is risky, especially for new investors. They’re unlikely to keep investing in a declining market, which is essential for passive strategies. Many will panic and possibly quit altogether. If my articles help even one investor stick to their plan and invest periodically, I see that as a win.
I understand that investing in small caps, contrarian positions, and cyclicals shouldn’t make up your entire portfolio. That’s why I’ve allocated part of my portfolio to holdings. Maybe I should highlight those more.
I believe in a core-satellite approach, but with holdings instead of ETFs. As an active investor, I prefer active management through holdings.
Year-End Schedule
The Christmas and New Year period is usually quiet for corporate news. I’ll take the opportunity to step back for a bit. There will be no general article on the next two Tuesdays.
On December 26, I’ll publish the market overview.
On January 2, the portfolio overview will be released.
Both will include any relevant corporate news picked up during that time.
Articles and Updates This Week
No extensive corporate news this week, but a full analysis of Focusrite is available. Below is brief news on five of our companies.
Last Tuesday, the article “Dare I Look in the Mirror” was published.