Ever hear the saw "Investing is a marathon, not a sprint"? While it's easy to get caught up in the minutiae of day-to-day events "as the market turns," it becomes that much more important for Foolish investors to not let themselves get sucked up in the noise that moves stock prices like a world-class yo-yo champ slinging a Duncan original.
It behooves you to know at least three things that you're looking for in a potential investment. Otherwise you'll be lost before you even get started.
1. Stuff of legend
Investing legend Warren Buffett looks for businesses that generate superior returns on equity because it is a key indicator of not only how profitable the business is, but also how well the company's assets and leverage are being managed. One of his most well-known holdings, Coca-Cola (NYSE: KO ) , generates close to a 30% return on equity on a consistent basis. While that may be a lofty goal, we can still find plenty of worthy candidates that generate double-digit returns on equity. Spice-maker McCormick (NYSE: MKC ) has generated returns on equity of better than 20% for more than decade, and the stock continues to outperform the S&P 500.
2. Inside info
Foolish investors know that insider ownership is usually a positive sign that management's interests are in line with shareholders'. Executives who don't "eat their own cooking" may have less incentive to make decisions in the best interest of the business, and ultimately shareholders pay the price. Take Panera Bread (Nasdaq: PNRA ) as an example. Insiders own more than 5% of the shares outstanding, with 4.5% of those held by co-founder and Executive Chairman Ron Shaich. This is a good indicator that management is committed to the business.
3. Value, return to me!
Another popular axiom of Foolish investing is finding companies that create value for shareholders, whether it be in the form of dividends, share buybacks, or just plain-old reinvesting in the business. Companies that generate consistent cash flows need to do something productive with that cash, and shareholders should reap some of the benefits.
Johnson & Johnson (NYSE: JNJ ) may not be the most exciting name around, but with a 3.5% dividend yield, it can add balance and stability to any portfolio. Bed Bath & Beyond (Nasdaq: BBBY ) just recently announced a $2 billion share repurchase program to start in early fiscal 2011. While in this case the repurchase is value-creating, it's also worth remembering that not all share buybacks are created equal -- sometimes they serve as cover-ups for options dilution.
Then there are companies like Markel (NYSE: MKL ) that don't pay a dividend at all. The idea here is that management is best able to maximize shareholder value by using cash flow to continue growing the business. Call it a play right out of the old Buffett handbook. And with master capital allocator and Chief Investment Officer Tom Gayner calling the shots, long-term investors are grinning from ear to ear because the company has grown its book value at a compound annual rate of 21.2% since the IPO in 1986.
Can I really have it all?
Put it all together and you may just find a company like Hasbro (NYSE: HAS ) . The famous toys and games company generates healthy returns on equity, sports a 2.2% dividend yield, has returned a total of $2.8 billion to shareholders in the form of dividends and share buybacks since 2005, and boasts insider ownership just north of 10%.
These are just the kinds of stocks that lead analyst Jeff Fischer and his team look for every day at Motley Fool Pro, along with his strategy to make money in any market using long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds.
If you're interested, Jeff is opening Motley Fool PRO for a few days on Tuesday, Jan. 18. The service has been closed to new members since June. To learn more and receive a private invitation to join, simply enter your email address in the box below.