YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Product

“Product” refers to certain innate characteristics that makeup a high quality company. We search for these high quality companies because we believe that, counter-intuitively, high quality businesses tend to outperform low quality businesses over the long term with less volatility. Additionally, we believe these types of businesses tend to significantly outperform their lower quality peers during catastrophic periods. Generally, these companies possess one or more of the following attributes:

Product_2017

The above grid plots return on tangible assets and consistency of cash flows of various businesses and industries. Every business can fit somewhere on this grid. We have chosen eight industries for illustration purposes. As a natural consequence of our focus on quality, we generally avoid businesses with both low returns on tangible assets and low consistency of cash flows such as auto manufacturing and commodity mining since this combination of attributes can prove fatal during recessions.

However, we are not, in principle, against buying lower quality stocks. A sufficiently low price can more than offset shortcomings in the underlying business, and our process of calculating a forward rate of return (as discussed in Price section) helps us to develop a frame of reference for how much extra return potential we should require before purchasing lower quality stocks. This point should not be overlooked because one would not want to fall into the trap of purchasing a security that appears statistically cheap, regardless of the quality of the assets and without understanding the reinvestment rate or the long-term viability of the business. However, at a price, when the expected forward rate of return appears to sufficiently compensate for the additional risk, we may venture into lower quality fare.

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