Posted on July 27th, 2005

The quest of investors has always been a search for effective investment opportunities. At Manifest Investing, we believe that the search is for excellent companies at sufficiently-high projected annual rates of return.

Leadership companies with solid expected returns. The quest of investors has always been a search for effective investment opportunities. At Manifest Investing, we believe that the search is for excellent companies at sufficiently-high projected annual rates of return. Benjamin Graham believed that there was a direct connection between the quality of a company and its P/E ratio. The discussion that follows is my interpretation of long-term fundamental analysis and its role in portfolio design and management. The most important lesson that Ive learned in over ten years of carefully studying (and practicing) long-term fundamental investing is that QUALITY MATTERS.

What is Quality? What is the role of quality in strategic long-term investing? Can we measure quality?

Quality is measurable and it can play a significant role in helping investors to avoid trouble. The time-honored path to success with strategic long-term investing is paved by understanding and respecting quality.

Quality. We all believe we know it when we see it. Whats it worth? www.investorwords.com has a powerful definition for quality. Quality is, quite simply, a measure of excellence. Excellence and respect are related. Excellent companies often exhibit consistent, credible growth and better results.

Quality is an important attribute as we build our sleep-at-night portfolios. Discovering leadership companies at the best prices necessarily means that we seek the quality leaders within their industries and accumulate them only when they go on sale. Implementation of strategic long-term investing over a lifetime means that we take advantage of opportunities to acquire the best of the best when it makes sense to do so.

Benjamin Graham On Quality

It must be important. Benjamin Graham was deeply troubled back in 1934. The antics and disasters of the late 1920s revolved around a lack of appreciation and respect for the fundamental quality characteristics of companies.

Monitoring the quality and projected return characteristics of all of the holdings in your portfolio is a valid approach to portfolio management. The long-term fundamentals and characteristics are continually monitored and the holdings with the lowest expected returns are candidates for potential replacement.

Graham reviewed research practices in place at the time and in 1934 wrote the first edition of Security Analysis. Authors Benjamin Graham and David Dodd dedicate a fair amount of attention to the subject and influence of quality on investments.

Benjamin Graham is widely regarded as the father of value investing and the text is universally used to teach fundamental analysis of common stocks. Graham is also known as Warren Buffetts mentor and most significant influence. Graham said, For the vast majority of common stocks, the average relationship between price and earnings will reflect the quality and growth of the issue. I found it intriguing that Graham called out this relationship and sought a means to define it. In fact, Graham referred to the P/E ratio as the coefficient of quality.

Graham believed that there is a direct relationship between price, earnings (P/E ratios) and Quality. He noted, a strong, successful, and promising company usually sells at a higher multiple than one that is less strong, less successful, and less promising Graham delineated the key influences on P/Es into two groups: