In the first part of the interview, Shah spoke about the factors that inhibit investors from generating superior returns. In this part, we ask him how to assess the quality of a business and its management. Find out what he has to say. Understanding a business is one of the most important aspects of investing. What does it actually entail? Quality of business and quality of management are inseparable Siamese twins of any good investment. For value creation, you need a good business that is managed well. By definition, good businesses are those that have the ability to outlast most of the timelines that you may think about. Quality protects value; growth expands it. Together they create a rising crescendo. The margin of safety adds to that equation, by gifting an additional (but one-time, not compounded) bonus, for having good valuation skills as well as for exercising discipline to actually benefit from that knowledge. This means it has fundamental character traits of not only surviving but also growing and thriving over time. A good business has to survive the exigencies and vagaries of the environment, build robust growth through these challenges and eventually prosper over time. Even the character of the growth has to be superior. These characteristics make a business durable or predictable. The superior character of a business protects its value, quality of growth enhances that value and growth of earnings expands the overall value. Ultimately, a business creates value through growth. Therefore, growth is a fundamental catalyst for value expansion. But the second part, which is not always noticed, comes from the quality of the growth, which preserves value and creates conducive conditions for growth to be possible. The quality of growth is a simple idea: whether you need the same amount of resources to achieve a greater outcome or need fewer resources to get the same outcome. Quality is not a fetish; it is not a dry philosophy for its own sake. It is not touted merely to make
This article was originally published on May 08, 2023.
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