Good Shares For Long Term Investment
When I invest, I don’t think about whether a stock will be up or down a year from now.
It’s not relevant to the task of building wealth as I see it.
When I buy a stock in a firm, I have never think anything and never estimate and no idea and neither does anyone else, no matter what they might tell you.
What I am interested in is acquiring as much ownership as I can in a broad collection of wonderful businesses.
How the Company Makes Money
You might be astonished how many inexperienced investors risk their hard-earned money buying ownership in a business that they don’t understand.
You should be able to explain, in plain English, to a student in elementary school in no more than a few sentences exactly how the company generates its profits.
You should be able to talk about the major cost inputs.
For example, if you’re examining a tire manufacturer, the cost of rubber and other materials is going to matter. If you’re examining a freight company, the cost of fuel is going to matter.
High Returns on Capital
The best businesses produce high returns on capital without the need for a lot of, or any, borrowed money.
Instead, they are profit-printing machines that churn out cash which the owners can extract without harming the core enterprise.
Most people don’t care which brand of screw they pick up at the local hardware store or which farmer grew their corn.
They do care, on the other hand, whether a convenience store carries their favorite candy bar or beverage.
Whether a local discount merchant sells their favorite toothpaste or mouthwash.
In cases where consumers are fiercely loyal to a product or service, the manufacturer or provider can generally charge higher prices.
This leads to a feedback effect where they grow larger, gain better economies of scale, and then generate even more surplus cash flow.
Keep Shareholders Happy
Good companies have a history of returning surplus cash in the form of intelligently-executed share repurchase plans and/or a dividend that grows at a rate comfortably in excess of the broader rate of inflation in the economy
Shares are Priced Sensibly
Even the best business in the world can be a terrible investment if you pay too high a price for it.
Specifically, price is arguably the most important variable in the long-run as even a terrible business bought at a sufficiently cheap price can result in wealth accumulation under the right conditions.
The Company Can Survive Tough Stretches
Storms will arrive in the economy as well as the capital markets. Often, these storms will provide no warning before showing up and wreaking havoc on your financial life.
Sure, these businesses might grow a little slower or provide a fraction of the excitement you might get from other businesses but you’ll be grateful you put your trust in them when the maelstrom is raging around you.