Own wonderful companies and let them compound. It is the most trusted idea in investing. On a decade of Indian data, it lagged.
Buy the businesses that earn the most on their capital, the great compounders, and hold them. Few ideas command more respect. So it is genuinely surprising that on the last decade of Indian data this screen trailed a plain index fund, and, stranger still, the very highest quality names were among the weakest performers.
Rank every company by how much it earns on its invested capital, keep the genuinely profitable and lightly indebted, and buy them at a fair price. Ten lakh rupees run through that screen grew to about ₹27 lakh. The same money in a plain Nifty 500 fund reached ₹38 lakh. So the quality creed, on this decade and in this market, returned about 11% a year against the market's 13.9%. It did not fail catastrophically. It simply, quietly, lost.
The best companies were not the best investments
This is the part that should give a quality investor pause. Sort every stock into ten buckets by the screen's quality score and there is no reward for climbing. The rank correlation was about +0.13, slightly the wrong way, meaning the highest quality decile, the wonderful compounders the whole strategy is built to find, sat near the bottom for return. Quality was real. It just was not what this market paid for.
The likely reason: you paid too much for wonderful
None of this means quality is a bad idea. It means quality is not free, and this decade the bill came due. Great compounders are exactly the businesses everyone can identify and everyone wants, so they rarely trade cheap. Measured against a plain index the screen actually gave up ground, an alpha of about minus 3.5% a year. Meanwhile the market handsomely rewarded the opposite: cheap, unloved, cyclical companies. In a decade that belonged to deep value, paying up for quality was the losing side of the trade.
A trusted idea, checked in the market that mattered
Quality investing is not wrong, and this one decade in one country does not overturn a century of evidence that great businesses compound. But it is a sharp reminder that no creed is exempt from checking. The most respected idea in the room still lost here, because the market spent ten years rewarding the cheap over the wonderful, and because wonderful was never on sale. Whether that reverses, whether the next decade belongs to quality again, is a bet you are allowed to make. What you are not allowed to do, if you want to keep your money, is assume the answer without ever looking.
So we took it to Krest, and ran it through the whole test.
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Every figure on this page came from a few clicks on Krest. See this exact analysis live and interactive, or point the same test at any strategy you have ever believed.
For education only. Not investment advice or a recommendation to buy, sell, or hold any security, strategy, or product. Past performance does not guarantee future results, and all investing carries risk, including the possible loss of capital. Make your own decisions, and consider consulting a SEBI registered investment adviser.
Best effort analysis. Prepared on a best effort basis from historical data and may contain errors, omissions, or assumptions. Shared for information and discussion only, and should be independently verified before you rely on it. Krest accepts no liability for any decision made or loss incurred based on it.
Figures reflect a quality compounders screen (ranked by return on invested capital and earnings yield, ROIC above 15%, positive EBIT, debt to equity below 1, market cap above ₹1,000 cr), reconstructed yearly over the last ten years of Indian data (since June 2016), measured against the Nifty 500 total return index. The quality compounding philosophy is associated with investors from Warren Buffett to Terry Smith.
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