Quality businesses that have relatively wide economic moats are able to fend off competition, maintain their market share and stable customer base. The economic moats also give rise to pricing power, allowing them to pass on higher costs to their customers and protect their profit margins. Take a look at Starbucks for example. Despite raising the prices of their coffee, it isn’t stopping consumers from spending at Starbucks and revenue continues to grow.
As a result, these businesses tend to deliver relatively stable revenue and lower earnings volatilities even during economic downturns, as compared to the young, high growth companies.
In addition, quality businesses tend to have more robust balance sheets and solid cash reserves to position themselves to withstand the economic downturns.
As Benjamin Graham says, “In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine.” No doubt in the short term there may be some selloff in the stock market due to irrationality and emotions, but the durable long-term profitability of these quality businesses will eventually translate into long term stock price appreciation. Share prices are ultimately driven by earnings over the long run.