Five Characteristics of Great Companies
Once you've narrowed your focus to a handful of companies, you need to fine-tune your research even more. One of the primary reasons to buy a particular stock is because of its future outlook. It's wise to buy and hold onto a stock for the long term, so quality is an important part of your investment strategy. Among other factors, you want to purchase stock in a company that you believe has the following traits:
Sound business model. You want to single out a company that has a solid business plan and a good grasp of where it wants to be in the years ahead, and a plan to get there. A company with a clear focus has a better chance of reaching its goals and succeeding than a company that just rolls along without a concrete plan.
Superior management. An experienced, innovative, and progressive management team has the best chance of leading a company into the future. Star managers have had a major impact on their prospective companies, and a company will often witness dramatic changes when a new management team comes on board. When key management leaves an organization, you will often see major changes in the way a company operates.
Significant market share. When a majority of individuals rely upon the products and/or services of a designated company, odds are the company has good insight into consumer preferences. Industry market leaders usually have a well-thought-out vision. However, the strongest company performance doesn't always indicate the best stock to buy. Be careful and look more closely at markets with a glut of competitors; sometimes the second-best company makes the best stock investment.
Competitive advantages. A company that is ahead of the pack will often be on top of cutting-edge trends and industry changes in areas like marketing and technology. You want to single out those companies that are — and are likely to stay — one step ahead of the competition.
New developments. If a company places a high priority on research and development, it's likely to roll out successful introductions. If the product or service takes off, the stock price may very well follow.
If the future outlook for a particular company appears promising — that is, as long as a company continues to exhibit these traits and act upon them — owning a portion of that company might make good business sense.
The Buffett Approach to Success
Many individuals want to emulate the successful investors. And why not? Warren Buffett, for example, has earned his fame by investing in quality companies instead of relying on technical analysis strategies. Buffett believes that if you buy stock in quality companies, you have no reason to sell your investments unless there is a serious underlying problem behind a price dip. Buffett believes that investors should understand a company and its industry before making any investment decisions.
When evaluating an analyst's report, make sure you read the fine print. If the author is a representative of the company being profiled, the report is not objective. If it's based on research paid for by the company, view that information with some healthy skepticism and do a little more research.
Although Buffett prefers to buy companies at prices below their potential, price is not the sole consideration in his stock selection process. Buying quality companies for the long haul is key. If one of your star companies suffers a dip in its stock price, Buffett says, it might be a good chance to pick up some additional shares.
