Discover a key price signal for investors researching quality stocks
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19 August 2026
Can fund managers really ignore where the companies they invest in are based?6 min readAuthor
Shares Magazine
The late Charlie Munger may not be as well-known as his close counterpart Warren Buffett, but his track record speaks for itself.
Between 1962 and 1977 his investment partnership Wheeler, Munger & Co generated a compound annual growth rate of 19.8% before fees, compared with 5% for the Dow Jones Industrials Average.
Munger was instrumental in transforming Berkshire Hathaway’s investment philosophy away from buying cheap ‘cigar butts’ toward buying ‘wonderful businesses at a fair price.’
Munger persuaded Buffett to buy premium chocolate maker See’s Candies when it was making just $4 million of pre-tax profits. It subsequently went on to deliver more than $4 billion in cumulative profits for Berkshire providing the cash to fund dozens of other acquisitions.
In 2008 Munger convinced Buffett to buy a $230 million stake in Chinese electric vehicle maker BYD. A decade later the stake was worth around $9 billion.
Munger was an early shareholder in membership warehouse and ecommerce giant Costco Wholesale where he served as a director from 1997 to his passing in 2023.
Outside of his shareholding in Berkshire, Costco became one of Munger’s most lucrative investments and compounding machines.
When Larry met Charlie
After reading Lawrence ‘Larry’ McDonald’s 2009 book about the collapse of Lehman Brothers (where McDonald was a trader) Munger invited him to Omaha during the Berkshire Hathaway annual results weekend.
The nuggets of wisdom that Munger shared with McDonald during a 40-minute private conversation have become foundational pillars in McDonald’s subsequent books and lectures.
In his latest book, ‘How to Listen When Markets Speak’ co-written with James Robinson, McDonald reveals the following quote from that conversation;
“Larry, if all you ever did was buy high-quality stocks on the 200-week moving average, you would beat the S&P 500 by a large margin over time. The problem is that few human beings have that kind of discipline.”
Munger and Buffett on charts
While we will never know whether Munger spoke those words, it seems unlikely he would reference something as mechanical as a moving average rule.
Munger’s business partner Warren Buffett studied technical indicators and read charts early on in his career, but after reading Benjamin Graham’s ‘The Intelligent Investor’ at 19 years of age, he abandoned the approach.
Buffett once joked that he realized technical analysis didn’t work when he tried turning a price chart upside down and got the same answer.
Why the underlying principles are more important
It seems more plausible that McDonald took Munger’s key investment principles of discipline and patience and reframed them to fit his trading style and mentality.
The principles highlight how emotional control and temperament matter more than complex mathematics in investing. Great businesses rarely become available to buy on the stock market at reasonable valuations.
Having the patience to wait months or perhaps years for a company to become available at a reasonable price is rare in the investment world.
Subsequently having the discipline and courage to buy when others are selling can feel very uncomfortable, but these principles are the bedrock upon which Berkshire Hathaway was built.
Searching for quality stocks trading at the 200-week moving average
We crunched the data to find quality companies and then calculated where the share prices were trading relative to the 200-week moving average.
A moving average takes price data over a specified timeframe and calculates an average. It is described as moving because the data window moves forward to encompass new data and therefore changes regularly.
To qualify for high quality, we focused on a return on equity and free cash flow to sales.
A high double digit return on equity often means a company has a defensible edge such as a strong brand or unique product.
Companies which can generate more than 10% free cash against sales can be considered high quality. It also means they have the means to self-fund growth and return funds to shareholders.
What’s special about the 200-week moving average?
There is no magic to the 200-week moving average.
In an ideal world, where profits are growing, share prices should move up over time which technically drags the 200-week moving average up to create a rising trend.
Two hundred weeks is equivalent to just under four years, which should be long enough for fundamental factors like sales and profits to exert more influence on the share price.
Therefore, stocks trading near the moving average can signal that a company or industry is experiencing some turbulence or hiccup. That could present an opportunity or a reflect deeper problems.
What are the caveats?
Quality companies should be strong enough to get back on track to consistent levels of profitability, but this is not always the case, so good judgement is required to differentiate opportunities from businesses which have permanently lost their mojo.
Unilever shares are trading just above their 200-week moving average and have gone pretty much sideways over the last decade.
The company is undergoing a radical restructuring as it looks to transition from a sprawling soaps-to-sauces conglomerate to a pure-play household and personal care group.
Following the demerger of its Magnum Ice Cream business, Unilever announced a deal to combine its foods division with McCormick which is targeted to close by mid-2027.
This will slim Unilever down to its 30 ‘power brands’ including Dove, Sure, Lynx, Domestos and Persil, which collectively account for nearly four fifths of group turnover. These elite brands have a superior growth profile.
After years of relying on price hikes the company latest half year results showed evidence of volume-led growth with second quarter growth reaching 5.5%, its best quarterly performance in a decade.
Companies caught up in the AI-related software sell-off
Following Anthropic’s release of a suite of industry specific generative AI tools in February, software companies and data analytics firms sold off on disruption fears.
Several UK companies caught up in the crosshairs include accountancy software group Sage, credit rating company Experian, RELX, Rightmove, auto classifieds marketplace AutoTrader, and even the London Stock Exchange.
Some of these companies have regained poise but they remain significantly below where they were trading before February.
Now the dust has settled, the question for investors is which companies are potential beneficiaries, and who are the true victims.
Analysts have noted that AI agents require accurate data to avoid hallucinating, which means companies that own proprietary data like RELX and London Stock Exchange Group (LSEG) could benefit by developing their own AI tools.
Similar reasoning could be applied to Sage which has successfully integrated AI tools, helping to boost subscriptions and recurring revenues.
It might be a slightly different story for companies that act as gatekeepers to their data, especially where it can be derived from public sources.
For example, in a defensive move, Rightmove recently embarked on a £60 million investment programme to partner with Google to deploy Gemini and Vertex AI.
Analysts at JP Morgan have highlighted that Amazon Autos’ potential expansion into the UK market, paired with native AI search could threaten AutoTrader’s position as the primary starting point for car buyers.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
