A vast segment of the investing community believes that investing in quality businesses is the ultimate recipe for investing success. The belief is that valuations matter less since premium valuations ascribed to quality companies is justified. However, reality is more nuanced than that.
For example, if you consider Nestle India’s stock price movement over a 10-year period (January 2013 to December 2022), the stock quadrupled from ₹4,900 to over ₹20,000, with healthy compound annual growth rate (CAGR) returns of 15.1% (ex-dividends). The company’s earnings growth happened at high return on capital employed, or ROCE, (10-year average ROCE of 56%) and valuations expanded to 90x trailing PER.
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