This article presents a practitioner’s definition of Quality. We make the case that both the research that identify quality as a promising factor or find that quality does not result in superior returns are misguided.
Over the long-term, business value growth and investment returns move in tandem. A portfolio comprised of high quality businesses, businesses that enjoy sustainable competitive advantages, should generate superior investment returns over the long-term driven by the ability of these businesses to grow their business values at above-average rates.
Over the long-term, U.S. equities have generated a total return of 8.9% p.a. In this article, I decompose this return among the various sources and show that inflation-adjusted capital appreciation is driven by underlying business return of the portfolio.