Readers of the Seventies hippie bestseller, "Zen and the Art of Motorcycle Maintenance" may remember long, interminable digressions into the nature of "Quality". For those that haven't read it, the book describes the author's journey with his son by motorcycle from Minnesota to California. Along the way, the author (Robert Pirsig) recalls his past self as a young man, who he calls Phaedrus. Phaedrus is a gifted teacher of creative writing at a small college, who becomes obsessed with the question of what defines good, or "quality". These philosophical investigations eventually drive him insane, leading to him being subjected to a particularly nasty episode of electroshock therapy.

A cautionary tale perhaps for those that spend too much time meditating on Quality - it can hurt your brain. But when it comes to investing, it sure feels like the concept needs a bit of intellectual elbow-grease.

What do we really mean by Good / Quality? 

There have been reams upon reams written about value investing. About the pros and cons of different value measures. Entire forests have been sacrificed for the sake of disecting metrics like the price/earnings ratio, the price/book ratio, free cash flow yield, or the price/sales ratio! So we know, pretty much inside out, what "cheap" means. But, in contrast, the concept of "good" is much more fuzzy!

Many have noted that Warren Buffett, the world's most famous investor, has evolved from just being a Graham-style bargain value investor to.... something else but what is that exactly? Buffett still likes cheap but he also likes good, high quality businesses. As he wrote:

"It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

But what does he really mean by wonderful? What signals quality? As we've discussed, Buffet-esque Quality is tied up with ideas like a good management team, a differentiated product, a good "economic moat", or barriers to entry.

Well yes, but these all seem like rather vague and subjective notions, aren't they? They lie in the eye of the beholder. One man's first class CEO may be another man's joker. A seemingly unbreachable economic moat may look narrow to someone else. Is there a way of making quality a bit less... well less qualitative?!  Is it possible to find quantitative signals that tell us that we're dealing with…

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