If you are going to try to do better than an index tracker by picking individual shares, then buying those of quality companies is one of the best ways to go, in my opinion. Good companies, bought at the right price, can deliver market-beating returns without involving lots of risk. But just buying good companies is not enough on its own.
It’s not difficult to identify companies with high profit margins, high returns on capital, great cash flows and low debts. Understanding how they make them and how sustainable they are is a different matter. Then there’s the most important question: Can these businesses still grow?
Without growth, it’s hard to distinguish between a low-margin, low-return business and a high one. If you accept that the value of a business is based on the cash it will produce in the future then if neither can grow, neither should command a high price tag.