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Investing Success Begins with Buying Great Companies

Focus on the Company When Building Portfolio

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Investing in the stock market is not about whether stock A is a good stock or a bad stock.

Successful long-term investors in the stock market know that you buy the company and that the stock is merely a representation of the company.

The stock comes into play when you buy or sell your slice of ownership in the company. This is not to say the stock is unimportant.

Successful long-term investors buy stock at a price that gives them the best chance for a profit when they sell and they sell the stock when it reaches its maximum potential or fails to meet expectations for growth.

What traits do excellent businesses have in common? To put the question another way, what are some of the important factors that separate a good stock from just another stock?

For this exercise, I'm going to look at three non-financial characteristics of businesses. The financial analysis is important, but if a business doesn't possess these important market attributes, it is unlikely it can sustain a leadership position.

Product Legs

Will anyone want their product or service tomorrow? It makes little difference if the company has the hottest product on the market today if it is a passing fad or yesterday's technology.

VCRs were once the hottest thing in video technology, but now the few retailers that still sell them are practically giving the machines away. Most video stores no longer carry new releases on video tape - everything they stock is in DVD and/or Blue-Ray format.

Great companies have products and services that people want year after year because of their universal appear or because the company keeps the products fresh with shifting consumer concerns.

There is not a railroad or steel maker in the 30 stocks that Dow Jones Industrial Average, yet those two industries created immense wealth for their owners in the not too distant past.

Deep Moat

Strong competitive advantages, often called the deep moat, protect great companies from competitors. These can be high costs of entry, such as in heavy manufacturing (think cars and airplanes); or name recognition like McDonald's and Coca Cola; or low-price leader, such as Wal-Mart.

These advantages (and superior companies usually have more than one) make it difficult for competitors to grab market share. Apple Computer's efficient operations let it build a brand that surpassed its competitors. It was able to create whole markets (iPhone, iPad and so on) and hold on to significant market share.

It also priced its products at the high end guaranteeing immense profits.

Southwest Airlines is another example of a company that did the same thing as its competitors, but did it better and cheaper.

Leader of the Pack

One of the most important characteristics of a great company is market leadership. Market leaders can set the agenda for their industry.

However, beware of the complacent giants that grow fat and slow in their leadership roles. They will eventually go the way of all companies that rest on past accomplishments and disappear into merger oblivion.

Market leaders set the pace for the industry and use their size to protect their position. They are able to hire top talent and have the resources to keep pushing their advantage.

Market leaders that pause to catch their breath are often passed and they never regain their leadership standing again. IBM is a good example of a company that could have owned the personal computer market, but let it slip away.

Conclusion

These are three non-financial characteristics of great companies. The numbers will usually follow any company that has a durable product or service, a significant competitive advantage and holds a market leadership position.

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