Do you find yourself spending a great deal of time looking for the latest and greatest investments? To some extent, I suppose every investor does. But the fact is that tomorrow's leaders are easier to find than you might think. In fact, this is the philosophy on which I base my dividend-stock newsletter, Motley Fool Income Investor, where we're beating the S&P 500 (AMEX: SPY ) while taking far less risk.
I sometimes marvel at just how many folks squander their investing energies looking for the next Microsoft (Nasdaq: MSFT ) or General Electric (NYSE: GE ) . I receive a good number of emails from such investors, who often ask for my opinion on lesser-known companies. And more often than not, they say, "Word is, it's going to be the next (fill in the blank) of the oil industry" or the "pharmaceutical business" or the "software market."
It seems everyone wants the company of the future, not the company of the now. Investors spend countless hours buying into the dreams of upstart businesses, believing this or the next will invent a better lightbulb and make them rich beyond belief. I certainly see the appeal there, but most investors are better off putting their efforts into researching companies that are already the best at what they do. While a few upstarts might indeed make money for early investors, most won't.
Buy tomorrow, today
In all likelihood, the next Microsoft is probably going to be, well, Microsoft. Companies that generate more than $13 billion a year in free cash flow (FCF) don't often disappear. In fact, they typically go right on crushing their respective markets -- or at least keeping a sizable share of them -- year after year.
After all, these firms have the capital, resources, and global distribution networks. They enjoy multibillion-dollar research and development budgets. They own the brand names that roll off of our tongues without a second thought. Why wouldn't they dominate tomorrow as they do today? Truth is, most of them will.
The untrodden road is a tough road
Though every successful business began as one, the life of a fledgling company is a difficult life, of course. For every Cisco (Nasdaq: CSCO ) or Google (Nasdaq: GOOG ) that hit it big, thousands never quite made it.
Some businesses didn't have the right leaders, or -- at some delicate stage of their existence -- were sunk by a single bad decision. Consider this: If IBM (NYSE: IBM ) had recognized that the true profit potential lay in software, not computers, Microsoft might not exist today. There are numerous events that, if they had gone another way, would have resulted in this company not being here -- at least as we know it.
That's how speculative most of these situations are. Even the most successful firms likely had more "50/50" moments than they'd care to remember. That's just the life of any young company. Yes, when you hit one out of the park, it feels great -- and doing so can result in spectacular returns. But for most of us, one or two great calls won't make up for 20 years of bad ones.
The point is that you can dramatically reduce your risk and most likely enjoy better results by choosing high-quality, dividend-paying companies with which you're already familiar. Putting your research efforts into buying those businesses at great prices will likely generate far superior returns than trying to unearth the company that will cure cancer.
Well done, not well known
I'm not saying that you must relegate yourself only to those companies with popular names, mind you. For instance, businesses such as California Water (NYSE: CWT ) and Alliance Capital (NYSE: AC ) are hardly household names. But they are blue chips in their industries, if ever there were any. Better yet, they're living proof that you don't have to speculate on biotech to earn sizable gains. These firms have generated total returns of 55% and 76%, respectively, for Income Investor subscribers in less than two years.
Whether generally recognized by the masses or not, these are still conservative businesses operating in proven markets, and those are the types of companies you should commit yourself to owning. We're not looking to build wealth in a week and lose it in a month. We're hoping to build wealth over a lifetime.
Suffice it to say, I don't want to be "50/50" anything. I prefer to succeed far more often than I fail. And by doing so, I believe I can deliver market-beating returns to your portfolio, while allowing you to rest your head on your pillow when the lights go out.
If you'd like to get some extra sleep while building wealth, consider a no-risk 30-day free trial to Income Investor. You'll receive access to all past recommendations and it won't cost you a dime.
Mathew Emmert sleeps well at night, but he has been known to snore occasionally. In case you didn't notice, he is the author of Motley Fool Income Investor. Of the companies mentioned in this article, he owns shares of Microsoft. The Fool has an ironclad disclosure policy.