Looking for the Best Stocks To Buy Now? Start With Founder-Led Companies

From left to right: Jeff Bezos, Howard Schultz, and John Mackey. Source: James Duncan Davidson, Adam Bielawski, Joe M500, via Wikimedia Commons. 

For beginning investors, deciding what the best stocks to buy right now are can be a dizzying task. There are thousands of publicly traded companies, each with its own band of cheerleaders. But by narrowing your search to look only at founder-led companies, you can make the list of possible investments much more manageable.

Obviously, there are hundreds of excellent companies worth investing in that don't have their founder running the show. But you don't need to find each and every great investment to be a successful investor; you only need a couple of excellent investments that can carry your portfolio through the years and help you meet your goals. By focusing on founder-led companies, your task becomes much easier.

Some big winners
You don't need to look too long to find examples of founder-led companies that have made hundreds of ordinary investors extraordinarily rich. Since founder Warren Buffett took over a failing textile business named Berkshire Hathaway in 1967, shares have grown 15,000%. He's not alone: Look at what some of these founders have accomplished.

Source: Google Finance. In some cases, a shell company existed before the founder came along, but the business has fundamentally changed since the founder took over.

Of course, there's a name for what we're doing here: cherry-picking. Anyone can try to prove a point by finding a couple of examples that support a hypothesis. It's much more impressive -- and instructive -- if that hypothesis can be proved by a larger set of unbiased data.

That's exactly what I set out to do, and the results were surprisingly clear. To understand, let's take a quick journey in time.

April 2008: just before the start of the great recession
Let's say you wanted to start investing back in April 2008. And why wouldn't you? Stocks had risen about 70% over the past six years, and they'd just taken a little dip that appeared to offer a great entry point.

You decided to buy shares of companies in the Nasdaq 100, an index that represents 100 of the largest companies listed on the Nasdaq index. Oftentimes, these can be some of the fastest-growing, newer companies available on the market.

Of course, you should always research each and every company you invest in, but what if you had just bought equal shares of companies that were led by founders back then? How would those stocks have performed against the non-founder-led components, and the larger market in general?

Back then, there were 31 founder-led companies in the index. Here's how they did against the other benchmarks.

Source: Author's research, Google Finance. Results accurate as of Nov. 1, 2013. Does not include dividends reinvested.

When breaking down the group of founder-led companies, there were some impressive findings: More than half doubled their stock price, five tripled in price, and three companies -- Amazon, Baidu, and Starbucks -- more than quadrupled their price. Furthermore, only four companies went down in price, led by Research In Motion's 93% plunge.

Conversely, the non-founder-led bunch, which was nearly double in size, had fewer companies that doubled in price, and four times as many stocks that went down in price.

Why is this happening?
There are lots of reasons we see the results we do. It should always be mentioned that randomness always plays some role. But I don't think that's enough to explain away such divergent returns between the two groups.

Certainly, not every founder is fit to be a CEO. In fact, 10 of the 31 founder-led companies had their CEOs leave between 2008 and 2013 -- and the stocks did better after the founder left.  

But by focusing on the Nasdaq 100, many of the founders not fit to be CEO were already weeded out, as they never could have helped their businesses grow to the point where they would have been included in the index.

For those that were left, many of the CEOs have much more holistic goals for their companies than simply increasing profits. Look at the four companies that showed the highest returns over this period, and you'll see what I mean.

Source: Google Finance

Furthermore, when someone founds a company and leads it for decades, the company simply becomes an extension of the founder. Though that certainly has its drawbacks, it means that the founder isn't looking to use business simply to siphon off money. It stands for something bigger, something that a founder -- and only a founder -- can identify with.

If you want to be investing in the greatest companies of our generation, finding these founder-led companies is the first step in your journey.