Earlier today, as I was pondering the quality of businesses - you will have noticed my style involves quite a lot of pondering and not too much doing, which may be a failing of mine – I stumbled came across a great article on a blog from 2011. I don’t know how I found it; sleepy little blogs come and go, after all, and lots of great ones languish in hidden corners of the internet… but this one made me smile.
It provided a better explanation of the value of high return companies than I could ever write and is a highly recommended read. Even more thought provoking, though, is the follow-up. Here, the author more or less runs through his take on the holy grail of investing; not just which companies generate super-normal returns on capital, which ‘any computer could do’, but why certain companies or industries generate consistently high returns. He uses airlines as an example of an industry which is basically structurally rigged to generate poor returns. See his intro, noting the following: