The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere

Chapter 6. Brought to You by the Letter "Q" (For Quality)

Don't lose money.

This advice sounds as banal as the slew of dos and don'ts (mostly don'ts) we get from parents as teenagers—don't speed, don't stay up late at night, don't drink and drive, use . . . I didn't say they were useless, just banal. So keeping that in mind, I am still going to say don't lose money during sideways markets. Not that you should go out of your way to lose money during bull markets, of course not; but in a rising market it's much easier to get back any losses you may suffer along the way. During a sideways market, the bull market tailwind that helps us make up losses turns into a tough headwind that makes it significantly more difficult to make up for losses. The QVG framework that I've developed and am about to introduce to you will help you to achieve this banal but all-important goal. Let's start with the first in QVG, letter Q—Quality.

	Quality is remembered long after the price is forgotten.
	--Gucci family slogan

A high-quality company is one that is able to maintain, or even to increase, its earnings power over an extended period of time, let's say 10 or 20 years. It's one that is able to emerge from an economic hurricane as strong as it entered it (or even stronger). Now that we know what a quality company is on the surface, let's take a peek at its components.

The Barbed Wire Fence

A business that can put money to work and earn a high return (a high return on capital) will draw new competition, ...