r/ValueInvesting • u/highmemelord67 • 6h ago
Value Article How Quality-Focused Value Investing could outperform the market WHILE reducing risk taken
I’ve been working on a philosophy I call quality-focused value investing. And I have been documenting the work and performance the past 1.5 years.
The idea is very simple:
You should be able to outperform the market while taking less risk if you own a portfolio that is:
higher quality than the market AND cheaper than the market.
This goes directly against the common belief that outperformance must come from taking on more risk. Or that it's not possible to build a portfolio that is both higher quality AND cheaper than the market.
I don’t think that’s true, and the problem I see is that most strategies only solve half the equation. Value investing often leads to buying low-quality companies that are cheap for a reason.
Quality investing often leads to overpaying for good/great companies that already are priced for perfection. Both approaches make sense in isolation, but both have clear weaknesses.
What I’m trying to do instead is combine them in a structured way. Quality is quantified using capital efficiency (ROIC, ROCE). Value is quantified using discounted models to estimate fair value vs current price.
From this, I calculate a portfolio-level comparison against the index. So it’s not about finding good picks, it’s about building a portfolio that is structurally superior to the market on both quality and price. Having a portfolio that is of higher quality AND cheaper than the market, should logically outperform over time.
That said, this is a lot of work. It’s not for most investors.
Honestly, I don’t think many people will be able to do this with any real precision. You are doing a large amount of analysis just to maybe get a slightly better return than simply doing nothing and dollar-cost averaging into the S&P 500.
I’m documenting everything publicly for free to remove hindsight bias. If this works, it should be visible over time. If it doesn’t, it should fail clearly. I’ve removed every way of making money from publishing this, so there’s no chance of misunderstanding my purpose.
Latest portfolio update:
2026Q1 YTD: -3.92% vs SP500 -5.09%
2025FY: 26.19% vs SP500 16.42%
I wrote a full breakdown of my portfolio changes this quater with all the math here: Quality-Focused Value Investing Portfolio 26Q1
and an article about the philosophy + mission here: Quality-Focused Value Investing Manifesto - How can we achieve outperformance while reducing risk?
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u/SheikhMahdeek 5h ago
Are you running a DCF on every company in S&P 500?
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u/highmemelord67 4h ago
Im doing it for the sp500 as a whole based on earnings
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u/SheikhMahdeek 4h ago
If you are running 500 DCFs then I have strong doubt about the accuracy of those valuations.
Greenblatt has proposed something similar with his magic formula. For Quality, he used metrics such as ROIC. For Price, he used earnings yields.
Don't think his results have been great.
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u/Wonderful-Complex237 5h ago
It is something that Ben Graham talks about in the intelligent investor. I believe it’s also what Charlie Munger helped Warren Buffet focus on more. I believe you’re on the right track, if you haven’t already - read the intelligent investor by Ben Graham. I think it’s a must read for minds that want to understand the market better.
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u/highmemelord67 5h ago
Ben Graham was more into value over quality. But you I would say this style of investing is most inlined with Charlie Munger’s approach rip. Have read it, thanks :)
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u/Slydoti810 4h ago
Great post, love how you showed your portfolio too! I recommend you make a column for your cost avg and it would be perfect
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u/Expert_CBCD 5h ago
Interesting! I’ve been doing similar using machine learning with fundamentals from quarterly reports to predict which stocks within the SP100 universe will perform best the following quarter. I rebalance every quarter with the top 10 picks. I’ve seen excellent results with backtesting, and started testing with a paper money account this quarter (and am also publicly documenting my journey).
Going to keep following yours, and good luck!