Successful long-term investing in the stock market can be summarized like this: buy a great company at a great price and let it build wealth for you over time.
A simple formula, but not so simple for investors to execute.
What do Google, Microsoft and Apple have in common?
Obviously, they are technology-based companies and, in the recent past at least, they have all been very successful.
There are other comparisons we could make, however the one I want to focus on is that they all can lay claim to having pioneered "the next big thing," in their particular areas. In some cases, they can claim more than one "next big thing."
Investors dream of finding the "next big thing" before anyone else and getting in before the market bids the price up. The key is knowing the difference between the "next big thing" and just the "next thing."
I picked these three companies not because they are technology companies, but because they stay in the news so most everyone is familiar with them and their products and services.
Each one in its own way has been successful with particular products and services because it has come to dominate its market. Let's look at each company:
Google - Google, which just went public in 2004, dominates the Internet search market. They are so clearly the leader as to define the market for others to try to capture. They own YouTube, the most successfully video website.
Microsoft - The software company is synonymous with personal computing. The Windows operating system drives over 90% of all personal computers. Their suite of Office products leads all others in market share. They have successful gaming products and enterprise solutions for large businesses.
Apple - Until 20 years or so ago, Apple was struggling just to survive, despite having given birth to the personal computer. A single product, the iPod turned the company around to the point that Apple stock tripled in price in 2004 and doubled in 2005. In the more recent past, Apple was the largest company in the U.S. based on market capitalization. Their iPhone and iPad defined two huge markets has changed the way people think about cell phones and the whole computing experience.
All three companies have had ups and downs in their stock prices, however they remain giants in their markets.
There are two basic elements to the success of each of these companies.
Elements of Success
All three of these companies had the "next big thing," but they also had something else. The second element was a huge market for the "next big thing."
That huge market is the difference between a big thing and a thing.
I have seen this analogy several places, so I don't know who to give proper credit to, but it makes to point precisely:
Would Microsoft be one of the largest companies in the United States if personal computers cost $100,000?
Obviously, the market for Windows would look very different than it does today.
Carrying that analogy on to the other two companies:
Would Google be as large as it is if Internet access cost $150 per month?
Would iPhones be so popular if it cost $9.95 to make a call or send a text message?
The point is the "next big thing" can only be that way if there is a market for it. Whether it is technology, pharmaceuticals or fashion, you must be able to see a large enough market for a product or service.
Is this product or service something that a large number of people are going to want? Can the company deliver the product or service in a timely manner and at a price that the largest percentage of the market is willing to pay?
Google, Apple and Microsoft have found a way to answer yes to these questions for some key products. Look for the same answers in any company that wants you to believe they have the "next big thing."