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Importance of quality of a portfolio for wealth creation

Slightly overvalued 'quality' businesses that are growing tend to be wealth compounders than questionable businesses at cheap valuations, suggests Ashutosh Gupta

Does the quality of a stock portfolio or a mutual fund ensure wealth creation, irrespective of their valuations?
- Urvish Patel

That is a fairly interesting question and a pretty debatable one. But let me provide my perspective which is based upon several interactions with various fund managers who often face this price versus quality conundrum.

One is that nothing is good at any price because even for the best of the companies, you want to attach some value beyond which, you feel that the price is not worth it. But having said that, most fund managers do contend that they would rather prefer buying a solid business at a relatively expensive valuation than a questionable business at a very attractive price. Because it is the quality where one can exercise greater control than price.

Fund managers don't contend that if you have quality businesses, even if you overpay a little bit to own them, then over a period of time, you can still hopefully make good returns. Because if you look at the track record in the Indian markets, a lot of quality businesses will almost always look expensive and yet, turn out to be wealth compounders because of inherent growth. But on the contrary, questionable businesses may not be able to survive the test of time and turn out to be wealth destroyers even from cheap valuations.

So I would broadly say that quality, provided there is an inherent growth characteristic in the business, along with time in hand, can compensate for some error of judgement on the price provided it is not completely out of whack.

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