Has this fellow no feeling of his business?
-- Hamlet, Shakespeare

Ok, so you've begun to narrow your list from the thousands of companies out there down to the few dozen whose products and services you buy every day, week, month or year. Coming up with this initial list is easy. But you're not going to be able to invest in and follow all thirty-five of these companies. Doing so would eat through your free time as well as eating you up with commission costs. In the end, you'd be paying a lot of time and money just to follow ticker symbols and stock prices, not the real businesses that lay behind them.

We're here to tell you that, to be truly and exceedingly Foolish, you need to concentrate on owning businesses and knowing those businesses, while worrying less about today's stock price. That's why we have gathered here under the title "Rule Maker Investing". We're looking for companies that are built to provide lasting services and positioned to make good money at their business for decades. But, now you've got to do the second half of the job: cutting this pile of repeat-purchase consumer-brand businesses down to the best few. We suggest that no matter how much or how little hard-core savings you have -- from $500 to $52.3 million -- you aim for holding between 5-20 companies in your portfolio.

But which ones, and why?

First, you need to dig up some information on these companies. The best place to do this, since you're on a computer, is the World Wide Web. There are tons of websites available with free research information. Yahoo!'s finance.yahoo.com is a nice place to start. I personally like www.stocksheet.com for the five-year financial history. When it comes to financial statements, the most reliable source is the Securities Exchange Commission (SEC), which requires U.S. public companies to file a quarterly 10-Q and an annual 10-K. These SEC filings are available from www.freeEDGAR.com, as well as our own quote.fool.com. Within Fool Data, we also have the "Snapshot," which is a handy quick look at what a company does and its basic financial status. (Here's a sample Snapshot of Cisco Systems.)

The companies themselves will also send you free information if you ask for it. Contact their "Investor Relations Department" and ask for the standard new investor propaganda ("Can you send me your full financial packet, please?"), which should include the most recent annual report, a 10-k report showing the real guts of the company, the last couple quarterly earnings statements, and a slew of promotional material detailing their commitment to excellence. Also, remember that if you have any questions about any aspect of the business, the Investor Relations Department is designed to answer them; it's a service for you. They built it for you; they named it after you; don't hesitate to use it. (The number for investor relations is usually under "Company Info" on a company's web site. If not, go to a label on their product and you'll often find an 800-number there.)

Ok, you've got links to all their information, that's great. But what the heck does it all mean? And what exactly should you be looking for? I mean, check it out, there's amortization, there are accounts payable, there's cash flow from investing activities, and cost of goods sold, and long-term debt. How much of all this do you have to know to invest successfully -- and what items are more important than others? At this point, I respectfully defer to five other Foolish sources for information:

  1. The 13 Steps to Investing Foolishly
  2. You Have More Than You Think
  3. The Motley Fool Investment Workbook
  4. The Motley Fool Investment Guide
  5. Investor's Roundtable Message Boards
We will be covering what we consider to be a few of the more critical components of the financial statements in later steps of this collection, but those three books, the 13 Steps, and the message boards provide a great foundation for financial analysis. Additionally, we'll be offering daily reports on the Rule Maker portfolio, primarily as daily instruction on stuff like mastering the balance sheet.

At this point, you need to know that without the ability to scan and interpret financial statements, you'll be flying blind in the investing world. But you also need to know that learning to read financial statements needn't take $40,000 annual payments for an MBA degree from a prominent business school. It doesn't have to be arduous -- and you don't have to pay up to become a CFA to beat the market. Once you have the basics down, you'll be able to checklist through the items you want to see: 1) rapid sales growth, 2) a high level of profits, 3) lots of cash saved, 4) little or no borrowed money, et cetera. These are many of the standard principles you'd apply to your personal finances.

In the remaining few steps of Rule Maker Investing, we'll share more about the hard financials. And we'll continue to talk about how much we like companies that sell products directly into a mass market for regular repeat purchasing. The mass market will often keep buying that sort of company's products through firestorm, airborn viruses, and major economic downturns. We like that. Furthermore, we want seemingly unshakeable brand names that people pay extra for and that people would go out of their way to buy (but that, not coincidentally, they don't have to go out of their way to find!). Further, we'll be searching for companies that shoot out cash from operations like a fire hydrant sends water into the air at that hot-summer-day block party. We also want companies accumulating a dragon's hoard of savings and spending it prudently. In case of total disaster -- like a sea change away from their core products -- we'd like our companies to have the option to throw money at the problem until it goes away.

We'll get more specific in the succeeding articles. But as always, we lowly Fools believe we'll only be presenting material you already understand... perhaps without having known it. You see, I've ended the Fifth Step just as I began the Fourth: "Here at The Fool, we make it our business to tell you things you already know."

Step 6: The Rule Maker Criteria »