10 Golden Rules

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If we had to create 10 rules for successful long-term investing, they wouldn't differ much from what Peter Seilern presents in his 2024 book "Only the Best Will Do."

Seilern discovered that from ~50,000 publicly quoted companies in OECD countries, fewer than 60 meet the 10 golden rules he developed. These rules focus on fundamental business qualities that persist regardless of market conditions or economic cycles.

His approach evaluates quality through track record, balance sheet strength, accounting practices, and governance, while measuring growth through increases in turnover, profit margins, and cash flow.

The 10 golden rules discussed below provide the specific criteria for identifying these rare businesses.

A scaleable business grows revenue and profits sustainably without proportional increases in costs or capital requirements.

The market for its products/services must be large enough and able to absorb continued expansion year after year, otherwise sales and earnings won't be able to expand at the required rate.

There are two primary business models that achieve this scalability:

Platform Models

Platform models create interaction mechanisms between producers and consumers, requiring minimal infrastructure investment relative to growth potential. Success depends on two key ingredients: (1) continued scope for revenue growth and (2) the ability to control business costs.

Within platform models, two main approaches exist:

1) Price-scaleable businesses: Maintain stable costs while generating revenue through pricing power, capturing market growth through price increases that customers accept due to lack of alternatives.

Rightmove, the UK property portal, connects real estate agents with house buyers. Since access to potential buyers is business-critical for agents and costs only a fraction of running an agency, they have no reasonable alternative to listing on the platform.

2) Volume-scaleable businesses: Drive revenue through increasing transaction volumes or user numbers, where the marginal cost of adding each additional user remains low.

Mastercard provides the infrastructure for card-based payments. The continued adoption of card transactions in both developed and developing markets drives consistent revenue growth, while the semi-fixed infrastructure means processing additional transactions costs very little.

Capacity-Driven Models

Capacity-driven models increase output by adding new capacity that can be scaled efficiently within proper capital allocation boundaries.

Fanuc, the Japanese robot manufacturer, uses highly automated production facilities to build its robots. Once these facilities approach full capacity, demand remains high enough to justify building new facilities that can be scaled up profitably.

Seilern emphasizes that scaleable business models are only valuable as long as the scope for market growth remains. When markets become too small or closed, companies resort to costly acquisitions, debt financing, and strategic reworking that often deteriorates their business models.

Operating in an industry growing faster than GDP makes everything else easier.

Industries with superior growth benefit from secular changes like cashless payment adoption, global water shortages, or aging populations rather than temporary trends or cyclical upswings.

By contrast, cyclical industries depend on the ebbs and flows of the economic cycle, making their earnings streams volatile and difficult to predict. In turn, these industries fail to satisfy the consistent growth criterion that quality growth investors require.

Seilern emphasizes that superior industry growth should be "largely independent of the ups and downs of the economic cycle." Therefore, growth should continue even during recessions, providing the consistency that quality growth investors require.

When industry growth slows or stops altogether, companies face a zero-sum game where gaining market share requires another company to lose it. Companies in declining industries like publishing, video shops, or coal production cannot generate sustainable growth regardless of individual company quality.

Market leadership takes years of investment, patience, and purpose to achieve. Once established, these positions become difficult to dislodge because winner-takes-most dynamics mean the top one or two companies capture disproportionate profits.

The key benefit of this dominant position is the ability to command prices. As Seilern notes:

Some companies that have maintained pricing power despite this shift to consumer power include:

Industry leadership doesn't always mean being the largest by revenue.

Fanuc, the Japanese robot manufacturer, is significantly smaller in revenues than the largest player Asea Brown Boveri. Yet it consistently outgrows and generates higher operating margins through state-of-the-art manufacturing, high-quality products, and strong customer service.

Competitive advantages fall into two broad categories: (1) superior products/services that command premium prices, and (2) superior business models that create structural advantages competitors cannot easily replicate.

Often, quality growth businesses enjoy multiple competitive advantages that create positive feedback loops, strengthening their position over time.

Examples of superior products and business models include:

True competitive advantages allow companies to become "price makers" rather than price takers, setting their own prices within reason without triggering demand erosion. When products/services become essential, companies can defy economic theory that suggests new entrants should compete away excess profits.

No competitive advantage remains infallible forever. Airlines demonstrate this clearly: despite massive productivity improvements over 50 years, the cost of long-distance travel has never been lower because technological advances became available to all competitors, passing savings to customers rather than shareholders.

Past performance might not guarantee future results, but for quality growth investors, a track record of strong organic growth spanning entire economic cycles is necessary.

“Superior growth rates” mean different things in different contexts:

These are demanding criteria that few companies meet, which explains why quality growth companies are so rare. Their share prices also command premiums that frequently scare away investors, but Seilern argues this premium rarely shrinks (when it does, you should probably buy).

Growth should also come from a company's own activities, not acquisitions which carry significant risks.

Merging different corporate cultures rarely works smoothly. Moreover, goodwill embedded in purchase prices assumes future returns that often disappoint, leading to impairment charges and permanent capital loss. Even "bolt-on" acquisitions that fit well with existing operations introduce unnecessary risk.

Beyond the acquisition problem, not all routes to earnings growth are equal:

In contrast, organic sales growth where companies set their own prices provides the most sustainable path. Estée Lauder has increased prices by ~2% annually for years and can likely continue. Oil exploration companies, where market forces set prices, cannot make sensible five-year price forecasts and therefore fail the sustainable organic growth test.

Diversification reduces bulk risk where losing a small number of customers or a single geographic market could devastate the business. It allows businesses to withstand demand shocks by breaking reliance on single sales groups or channels.

Seilern illustrates this with two IT services firms:

While diversified companies don't benefit as much from acceleration in single segments, they're protected from concentrated downturns.

Benefits of proper diversification include:

Here are two companies using diversified data effectively:

Diversification isn't without costs. Expanding reach requires operational capacity, and more sales destinations increase internal competition for resources, raising the likelihood of poor capital allocation decisions.

Some excellent companies can only generate sustainable growth by sticking to specific geographic or customer strengths. But on average, the benefits of broad revenue profiles outweigh the risks.

Businesses that generate strong profits with minimal capital requirements create more value for shareholders over time.

Low capital intensity means using modest amounts of capital productively, which naturally excludes businesses requiring regular capital injections like industrial manufacturers that transform raw materials.

Value creation occurs when returns on invested capital exceed the cost of that capital (ROIC > WACC), with the size of the spread determining value creation magnitude. Management must ensure returns from investing in the business exceed what they could achieve investing elsewhere at similar risk levels.

The power of compounding high returns becomes clear through Seilern's comparison. He contrasts a quality growth business (20% return on capital, reinvesting 55% of profits) with an average S&P 500 non-financial company (11% return on capital, reinvesting 21% of profits), both starting at $10 EPS:

The quality growth company achieves 186% total earnings growth (11% CAGR) while the S&P 500 average manages just 27% growth (2% CAGR). The quality growth business earns nearly 2.5x more per share after a decade, despite the average company paying higher dividends initially.

For companies to reinvest profits at consistently high rates and benefit from compounding, the right conditions must exist. Scaleable business models, leadership in growing industries, and sustainable competitive advantages enable continued reinvestment at similar return rates.

Investors should favor quality growth businesses that reinvest profits over those that pay dividends, assuming they can sustain high return rates.

Debt introduces risks that quality growth investors should avoid, even when interest rates are low or negative.

While financial theory notes that debt interest reduces tax liability and can enhance returns when ROIC exceeds borrowing costs, debt remains a burden that amplifies both gains and losses.

Seilern identifies three fundamental problems with leveraged balance sheets:

Even corporate giants face leverage risk. During the 2008 crisis, credit default swaps implied General Electric's life expectancy was just four years despite the company's century-long history.

The ideal company maintains zero or negative net debt (when cash exceeds total debt). If debt exists, it should be repayable from free cash flow within a year or two at most.

Quality growth companies present accounts that are easy to understand with limited small print and few differences between adjusted and reported results.

Red flags requiring scrutiny include:

Some industries make transparency nearly impossible by their nature:

These transparency issues explain why traditional financial businesses and extraction companies rarely qualify as quality growth investments.

Effective management allocates capital wisely, maintains operational excellence, and prioritizes long-term value creation over short-term metrics.

Shareholder alignment usually means management holds meaningful equity stakes with wealth tied to long-term success rather than short-term movements. Family-controlled businesses, for this reason, often excel because their long-term orientation matches quality growth investor time horizons.

Warning signs of poor management priorities include self-importance, glossy annual reports full of executive portraits, and reluctance to admit mistakes. The ideal CEO demonstrates intuitive leadership, giving credit to others when things go well while accepting blame when they don't.

Quality growth investors look for management willing to maintain open communication in both good times and bad. Trust grows when companies provide full and honest disclosure rather than carefully scripted investor relations responses that reveal nothing substantive.

Lastly, remuneration structures (how executives get paid) should motivate decisions serving value creation using the right metrics:

Ideal companies have business qualities so strong that execution risk remains limited, with minimal key-person dependency and lower potential for capital misallocation.