Let's get one thing straight: To get obscenely rich in the stock market with a buy-and-hold strategy, you need to own the best companies. There's no other way around it. But how can you determine what the truly best companies are?
I'm here to tell you that there are five simple characteristics shared by every single one of the best companies on Earth. If you can identify these five traits and have the discipline to invest at the right times (and perhaps sell if things change), you'll never have to worry about money again.
The fab five
Without further ado, the five traits are:
- Creation of high utility for customers
- Something special
- High rate of innovation
- Excellent managers
- Efficient operations
It sounds like a basic list, but when you come down to it, business is basic -- the production of a good or service for a customer. The quality of a company depends on how useful its product is, how defendable its markets are, and how fast it can produce new and better products. Solid management and cost-effectiveness are a must as well.
The fab five, one by one
Let's examine each trait and look at some examples:
"Creation of high utility for customers" means producing a good or service that customers value very highly, or literally can't live without. A perfect example is Rockwell Collins, which produces navigation and landing guidance systems for airplanes. I don't know about you, but I'd classify the piece of equipment that allows a plane to land as something that creates a lot of value for airlines and passengers. This, in turn, creates steady demand for Rockwell Collins' products.
"Something special" is intentionally broad, because this trait comes in many forms. The idea is that the company needs that little bit extra to maintain its advantage and inhibit competition. It could be a patent or even a secret ingredient, as in the case of Coca-Cola (NYSE: KO ) , or a network effect, as in the cases of MasterCard (NYSE: MA ) or eBay's (Nasdaq: EBAY ) PayPal, where the bigger the network, the bigger the advantages for the company.
"High rate of innovation" relates to how a business must constantly improve to stay ahead of its rivals. An excellent example is Apple (Nasdaq: AAPL ) . I recently dug my first iPod out of a box and was amazed at how clunky it is. Plus, it only has 10 gigabytes, whereas the new models have 120 gigabytes -- 12 times as much, and, I'm embarrassed to say, more than my home laptop. Another legendary innovator is 3M (NYSE: MMM ) , whose innovations span from masking tape to orthodontic braces to Post-it Notes (introduced in 1980).
"Excellent managers" is self-explanatory. A company is only as good as its assets and the people using them. General Electric (NYSE: GE ) is a great example -- it spends an estimated $800 million every year on educating its employees and managers. The results speak for themselves in GE's dominant market positions and highly regarded managers, who are among the most-sought-after executives to lead other companies.
Finally, the company needs to "operate efficiently." This enables the company to earn enough money to focus on the first three traits. The pioneer of efficient manufacturing is Toyota Motor, which was the early adopter of lean manufacturing and kaizen techniques. Another excellent example is United Technologies (NYSE: UTX ) , which manufactures everything from aircraft engines to elevators and air conditioning systems. It is continuously looking to reduce costs by redesigning factory floors, workflow processes, and products.
Start investing
That's it. The five characteristics of each truly brilliant business on this planet. They are self-evident, yet ever-so-difficult to obtain and hold. I encourage you to think about each potential investment in this light -- how much value does it really create for the customer? Can it do something no one else can do? Is it well-managed? These questions are simple but the implications are very deep, and if you can check off even four out of five boxes, you'll likely have a winner on your hands.
This is all we do at Motley Fool Inside Value -- focus on identifying companies with these characteristics and pick our spots to invest in them. We're extremely pleased that many of the world's best businesses are on sale now.
Good luck investing, and if you need help, consider taking a 30-day guest pass to Inside Value to get all of our recommendations, including our five best ideas for new money now, as well as a discounted cash flow calculator you can use to evaluate companies on your own. Click here to get started.
Fool analyst Andrew Sullivan owns Apple shares, but has no financial position in any of the other stocks mentioned in this article. 3M, Coca-Cola, and eBay are Inside Value picks. eBay and Apple are Stock Advisor selections. The Motley Fool has a disclosure policy.
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