Look into your crystal ball and tell me what you see. What will the economy look like? What will be happening in the stock market? Which companies did you pick five years ago and was that decision a good one?
Predicting the future is not an easy task, especially considering it's difficult enough just understanding what today is all about. However, long-term stock investors are challenged to do just that.
The good news is you don't have to know exactly what the future will look like to give yourself a good shot at picking winning stocks. What you should focus on is what attributes should a company have to survive and thrive in an unknown and unknowable future.
While there is no single answer that will satisfy every possible economic and market condition in the future, there are some attributes that give a company the best chance for success.
Here are some that come to mind – you may think of others:
Ample cash – We don't know what the credit markets will look like in five years, so companies that generate plenty of free cash flow will have a good chance to succeed. This suggests large, mature companies that have a firm grasp on market share, yet are nimble enough to seize opportunity when it presents itself.
Global market – Global markets are already important and everything suggests they will become more so in the future. China and India come to everyone's mind when looking for future growth markets. However, they are far from the only (or even the best) global markets for U.S. companies. Winners in the future will likely offer products and services that have value in many different global markets.
Technological leaders – Future winners will know how to leverage technology on a global scale. In this case, technology may or may not be an actual product or service. It will, however, be required for doing business efficiently. Even if a company's products and services are "low tech" (think toilet paper or toothpaste, for example), the business must use the best technology available in the production, marketing and distribution chains.
Innovation – There will always be room in the market for companies that change the way we think or interact with products and services. Traditional thinking has been that most innovation comes from small, focused companies and is then adopted by the market. That isn't always true – think iPad, iPhone and other game changers that Apple introduced. Innovation in and of itself will not have much impact if a company does not have the financial and/or market strength. Look for "game changers" from companies that have the financial muscle to take advantage of innovation to capture market share (or create a market).
You may want to add to this list, but consider that making money in the stock market will likely become harder, rather than easier as the pace of change quickens. Picking companies that can act on change will make the difference in your future stock returns.
