Take a Lesson From Private Equity

Just like real estate "flippers" who can't find buyers and are instead stuck being property managers, private-equity firms may also be becoming reluctant managers over the next few years if credit continues to tighten and the pool of potential buyers dries up.

While private-equity firms such as Blackstone (NYSE: BX  ) , Carlyle, and KKR may be more efficient at running the companies they own than their predecessors were, flipping companies for a profit is what they do best.

What's more, private-equity firms may get stuck managing these companies for a longer period of time. Theodor Weimer, head of global investment banking at Italy's UniCredit, recently noted that he expects the amount of time between leveraged buyout and exit to increase from three years today to anywhere from five to seven years.

Yeah, about that deal ...
Just like the mortgage lenders who lent real estate flippers the money to buy their properties, the investment banks -- such as Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , and Credit Suisse (NYSE: CS  ) -- that have lent private-equity firms around the world $400 billion also want their money back eventually.

And as private equity is finding it harder to flip companies to repay the loans, they've had to become choosier about which companies they buy and how much they pay for them.

They understand that if they are going to be stuck managing a company for the next five to seven years, they want to make sure it will continue to generate profits and maximize the return on their investment. This is exactly why Goldman Sachs (NYSE: GS  ) and KKR are trying to get out of their $8 billion deal for Harman International (NYSE: HAR  ) , and it's also why Home Depot (NYSE: HD  ) recently reduced the price of its wholesale supply unit by 18% for its private-equity suitors.

What all this means to you
While individual investors like us won't be stuck managing the companies we own, we can take a lesson from private equity's current dilemma: Be sure to buy quality companies worth holding for the long term, and buy them at the right price.

Start with the company's management. Look for a management team with:

1. Unquestionable commitment and integrity.
2. A long-term view toward value creation.
3. A focus on dominating and growing its market niche.

This was the approach that Fool co-founder David Gardner took five years ago, when he saw tremendous long-term value in Amazon.com, even as the stock was nearly 90% off its 2000 highs. He believed in Amazon founder and CEO Jeff Bezos' ability to refocus the company's profit strategy and continue to dominate the online retail market. (It's up some 475% since.)

So there it is: Buy to hold for the long term, at the right price, with the right managers. In other words, invest in companies, don't speculate on stocks.