How to Gauge a Good Growth Company

I think everyone’s trying to figure out what happens with the economy on a global basis. What’s the impact of interest rates, where do they ultimately settle out? We’re focused on businesses.

It’s been a tough environment for growth-style investing, but I think the difference is what you focus on. A lot of investors will focus on quarterly earnings reports. We think they actually tell you very little about the long-term value creation of a business. You can manipulate them through share buybacks [and] through tax rates. But ultimately, what drives long-term value is a company’s ability to generate high returns on invested capital, and reinvest to unlock the power of compounding. What we care about when we look for growth companies are businesses that generate the most operating profit per dollar invested in the business. That’s different than earnings growth, which only looks at the income statement. So, the way I would sort of summarize it is to say we care not only about whether companies grow, but how they grow. And as we sit here today, we’re finding a lot of interesting opportunities because investors have prioritized short-term clarity for long-term value, in our opinion.

I wouldn’t waste time on trying to read market signals. I think what you really want to do at the end of the day is buy good businesses, as we’ve defined it—because that’s a creator of long-term value—pay reasonable prices for them and then try to do as very little as possible so you don’t beat yourself. So, worry about the things that matter, things that you can actually research, and things that you can get behind and invest in for the long term—good businesses