How Companies Become Destined For Greatness Part 1
In ancient times, kings and rulers fantasized about conquering the world. They would grow up listening to their fathers tell stories of great wars in the conquest to take over lands, enslave entire groups of people, and command respect from all for the sake of profit and power. In reality, few kings ever got far, and fewer managed to rule for long. Only a minority of the population enjoyed the riches, and even then, it was solely because it was at the expense of the captives.
Today, each of us can potentially own businesses that are truly global, help to pay the wages of thousands of people by making sure we own only businesses that are ethical, enjoy an ever-growing stream of income as the years goes by, and do all of this using the win-win mechanism of a free market society. With one click of a mouse or one touch on a screen, the BUY signal confirms our partial ownership via our shares, and we get to participate in the grand capitalistic game – the free enterprise system.
We are all very lucky to be living in this day and age. With this blessing comes a great responsibility – not all businesses are built for growth and success. In fact, the majority are mediocre, at best. That is the reason why before even considering becoming an investor, it is imperative to study and ingrain the 5 Investing Essentials. Remember, businesses are founded on ideas dreamed up by people just like us and managed by people just like us.
There is nothing magical about it. Finding those select 20-30 businesses that will enrich you is the quest to locate the ideal blend between capable management, sufficient funds, a well-loved product or service, and a booming trend to market to.
20-30 stocks virtually assure sufficient diversification, according to countless market studies over the years. In fact, Berkshire Hathaway owes most of its impeccable track record to a mere group of 15 stocks. Outside of those, Warren and Charlie are average investors.
Investing in index funds is not a bad idea, but you must realize that owning 500 companies guarantees diversification, but also means you are buying overvalued, mediocre companies hiding in there and paying management fees for the pleasure of overpaying. It’s much safer and more financially rewarding to focus on your best ideas.
This is the whole point behind the Watch List strategy. We, as investors, must devote more time to researching companies and less time following screens and prices. When a company proves itself to be destined for greatness, calculate a reasonable price for it with an adequate margin of safety, make sure your Position Sizing is intelligent, and if it’s trading above your maximum price, add it to your Watch List and wait. If not, pull the trigger and mind your Stop Losses.
How to Spot a Company Destined for Greatness
This, indeed, is the holy grail of investing. If you are not a full-time investor or money manager, and most aren’t, then it is, in my opinion, wiser to spend time finding the best sources of information, rather than researching and analyzing companies in your spare time.
You could hire a money manager, but Tony Robbins’ book, “Money Master the Game,” proves without any shadow of a doubt that 94% of managed money doesn’t beat the index when you include fees. The ideal investing strategy for 2016 is an intelligent balance of a number of assets. This Asset Allocation idea originates with the greatest performing fund of all times, Ray Dalio, and I personally tweaked it for the individual investors’ advantage. You should educate yourself on its advantages. This sort of portfolio handily beats the markets, and has for over 20 consecutive audited years.
Companies have two major obstacles to overcome in order to be destined for greatness:
- Race to profitability.
- Managing profits for continued growth.
In part 2, we will discuss both.