Quality investing looks for companies with high and stable returns on capital, little debt and earnings that hold up in bad years. The idea is that such businesses can compound their value for a long time, so it is worth paying a fair - not necessarily low - price for them.
Typical signs
Return on invested capital consistently above about 15 %, stable or rising margins, strong free cash flow, modest debt, and a clear advantage over competitors such as a brand, a network or high switching costs.
The risk
Quality is widely sought, so these shares are often expensive; paying too much can lead to weak returns even if the business does well.
This content is general information, not investment advice.