“A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable”
– Warren Buffett, American Value-Investor
arvy’s teaser: The best stocks combine story and chart: deep moats, strong culture, high cash flow – paired with relative strength and new highs. Quality is no coincidence. It is measurable. And visible.
Here are 15 basic criteria we look for in a “Good Story & Good Chart” company.
arvy’s YouTube Channel: Good Story & Good Chart
Table of Contents
Good Story
Moats
A “Good Story” Begins with a Moat.
Every great company starts with a durable competitive advantage — or what Warren Buffett famously calls a moat.
Common moats include:
- Intangible assets, such as patents
- Network effects
- Switching costs
- Cost advantage
- Efficient scale
Chart 1: Market Performance by Moat Rating and Moat Source
Source: Morningstar
A moat keeps competitors at bay, helping a company preserve pricing power. This is typically reflected in high and robust gross margins. And gross margins matter — they give a company breathing room, especially in inflationary times.
Just look at the difference when inflation hits.
Chart 2: Impact of input cost inflation on Hermès and Volkswagen
Source: arvy, Koyfin
Founder-lead
Leadership that owns the mission. A great company isn’t just about numbers — it’s about people. And more specifically, the people running it.
As a co-investor in my own strategy, I want to back companies where the people in charge have fire in their eyes — for their product, their mission, and their future. That’s why I look for founder-led or family-run businesses.
These organizations tend to outperform over time.
Chart 3: Founder-Led Companies Outperform the Rest (based on S&P 500)
Source: Bain & Company, Harvard Business Review
Companies where the founder or family still plays an active role — whether as CEO, chairman, board member, owner, or advisor — tend to outperform and demonstrate more enduring, long-term success.
Why?
Because they built the company from the inside out. That DNA becomes part of the culture, and it affects everything — from product development to long-term vision.
Corporate culture is the cornerstone of any successful business.
Period.
Chart 4: Companies that are ranked “Best Places to Work” outperform
Source: Great Place To Work, Glassdoor
Capital Allocation
Warren Buffett wrote it back in 1979 — and it remains true today:
The most important financial task of any CEO is capital allocation.
It determines what kind of returns shareholders can expect. A company that’s averaged just 6% ROIC over 20 years? Don’t expect much more than 6% returns going forward.
Seek industries and companies with consistently high ROICs.
Chart 5: ROIC by Industry for the Russell 3000, 1990 – 2021
Source: Factset, Counterpoint Global
Ultimately, share prices follow earnings and sales.
Focus on businesses that grow organically, though acquisitions can be acceptable when they are proportionate and strategically sound. A clear, long-term orientation reduces the emphasis on valuation multiples, making higher prices justifiable for companies delivering consistent, high-quality organic growth.
Chart 6: Sources of Total Shareholder Return for Top-Quartile Performers, S&P 500 (1990 – 2009)
Source: BCG Analysis, Morgan Stanley Research
Free Cash Flow
Cash is the lifeline of any business. With strong free cash flow, a company can:
- Invest capital with a high return
- Make smart acquisitions
- Reduce debt burden
- Buy back shares
- Pay dividends
As for valuation, focus on free-cash-flow yield. It’s harder to manipulate than earnings.
After all, profits are an opinion.
Cash is a fact.
Chart 7: Valuation Metrics, The Power of Free Cash Flow Yield, 1991 – 2022
Source: Factset, PACER ETFs, Data calculated based on the top 100 companies in the Russell 1000 Index for each valuation metric.
Net Debt
This part is simple.
Avoid companies that rely heavily on debt. Leverage may amplify returns in the short term — but it cuts deep when things go wrong.
As Gordon Gekko famously said in Wall Street (1987), it’s a dangerous game.
Chart 8: The movie Wall Street, 1987, with the corporate raider Gordon Gekko
Source: arvy, Unsplash
Structural Tailwinds
Why fight headwinds when you can ride tailwinds?
Let’s pause and summarize what defines a “Good Story”:
A wide economic moat, capable management, high ROIC, strong capital allocation, low debt, high profitability, disciplined growth, and a clear secular tailwind.
Buy these companies at a fair price — and over time, returns follow.
But here’s the catch…
Chart 9: Example of structural tailwinds in the arvy portfolio
Source: arvy
Good Chart
We’re humans — and humans fall in love with stories. A good narrative can cloud our judgment.
That’s why we turn to something more objective: The Good Chart. At arvy, we’ve identified four price characteristics that show up time and again in top-performing stocks over the past 140 years:
- Accumulation and relative strength
- Strong price development
- Price linearity
- New highs
Chart 10: arvy’s proprietary screening of the equity investment universe
Source: arvy, per Q4 2023
Accumulation & Distribution
Price action reflects investor behavior. And the cycle repeats itself over and over.
Take Stan Weinstein’s stock price maturation cycle — it’s a powerful framework that still holds true.
This pattern of price behavior consistently appears in market-leading stocks.
Stay tuned for the last chart.
Chart 11: Stock Price Maturation Cycle by Stan Weinstein
Source: Stan Weinstein, Secrets for Profiting in Bull and Bear Markets
Relative Strength
In 1989, Warren Buffett rang Peter Lynch to quote a line from «One Up on Wall Street»:
“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” Or as Lynch opined, he cited his biggest mistake.
Look for quality stocks with strong price leadership.
And once you’ve found them, let them run.
Chart 12: Constellation Software and its relative strength line (green) vs iShares ACWI
Source: Tradingview
Linearity
Consistency matters.
A stock that’s doubled over ten years might look impressive — but how it got there matters more. We want smooth, sustained price development, not spikes.
Stock market sayings like «The trend is your friend until the end when it bends» are not just pretty phrases.
Chart 13: Focus on the bottom and neglect the top, price linearity reflects strong fundamentals
Source: Tradingview
New Highs
The real money is made in new highs. If a stock doesn’t make new highs, it can’t make a big move.
Bottom-fishing and chasing turnaround stories isn’t where the big long-term gains are made.
Chart 14: The money is made with new highs (green dots)
Source: Tradingview
Let me leave you with one final chart and a favorite quote from trading legend Jesse Livermore:
“There is nothing new in Wall Street. There cannot be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
Remember Stan Weinstein’s cycle? The irony is inescapable. These charts are 300 years apart.
Patterns don’t repeat exactly.
But they sure do rhyme.
Chart 15: South Sea Bubble (1720) vs ARK Innovation (2021)
Source: arvy, Marc Faber, Tradingview
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