Investing in companies you don't understand isn't really investing at all. That would be gambling at best -- throwing money at an unknown target and hoping for the best. Invest in what you know, as master investor Peter Lynch said. That's the best way to ensure that you're separating the truly promising wheat from the worthless chaff -- before putting real money into any of them.
With that in mind, here's a handful of companies that every investor should be able to understand in a hurry. If you don't have any particular field of expertise from which to launch your investing strategy, these super-simple business models would be a great place to start.
Business owners in need of uniforms, cleaning services, and logotype-adorned promotional items often go straight to Cintas (NASDAQ:CTAS) for help. The company is a leader in all of the market niches mentioned, turning Cintas into a pretty good measuring stick for the economy as a whole.
This company provides essential services to every sector. Cintas counts more than 1 million companies among its clients, chiefly focused on uniform rentals and facility services in North America. This company does all the boring maintenance stuff for other businesses, allowing the clients to focus on whatever it is they do best.
You probably learned all you need to know about Cintas' business model from the first sentence in this section. It really is that simple. Cintas is very good at its chosen field of expertise, and the ho-hum uniform rental service is actually a cash machine that drove Cintas shares to market-crushing returns over the last 10 years:
See, you can beat the market without getting fancy. Cintas dominates a clearly defined market niche, and shareholders can laugh about it all the way to the bank.
I don't have to tell you how Starbucks (NASDAQ:SBUX) makes money. I'll do it anyway, just so you can see how incredibly simple this company is.
Starbucks sells coffee and related products. Sure, customers could make their own coffee at a large discount to Starbucks' premium drink prices, but they keep coming back to the coffee shop because it's a convenient way to get your hands on a well-made cup o' joe.
You can dive deeper into certain wrinkles of the Starbucks model, of course. Some Starbucks stores are company-owned and others are franchised locations under the management of local business owners. The company must keep its product quality reliably high, or else the whole business model falls apart. Other than that, Starbucks' management can focus on creating effective marketing campaigns and expanding into new international markets. Those are the most difficult parts of this sophisticated yet uncomplicated company.
I don't have to tell you that Starbucks tends to beat the market too, right? Everybody knows, and here's all the evidence you need:
Again, you already know this company. Netflix (NASDAQ:NFLX) is a leading provider of internet-based entertainment services, having kick-started the market for streaming video way back in 2007. What began as an inventive take on movie rentals, shipping DVD discs in red envelopes, morphed into a video-streaming service in a hurry. You might recall the Qwikster debacle, where Netflix made that switch official -- in a painfully awkward way.
OK, I am getting carried away here. You don't have to know much about Netflix's history in order to understand how it operates today. But the company has been in the public spotlight for so long that you probably do know what I was talking about a minute ago.
Appropriately enough, you can boil Netflix's business down to a classic movie quote.
If you build it, they will come.
-- Field of Dreams, 1989
That's it. Netflix has built a user-friendly video-streaming service that lets viewers consume its content on pretty much any device with a screen and an internet connection, in any country where it is legal to do business with American companies. As long as Netflix keeps feeding high-quality content into this strangely unique user experience, subscribers will come back for more -- and bring their friends.
Like Starbucks, it's easy to get lost in the complexities of Netflix's detailed operations. The company is producing a lot of content of its own nowadays, replacing the old model of licensing shows and movies from other companies. Cash flows are negative at the moment but management expects to turn that metric positive in a few years. Every international market comes with its own set of cultural and legal challenges. Nobody really knows how consumer tastes will change in the next year or the next decade. Netflix has to adjust to all of these details and more.
But it's OK if most of that goes over your head because the Kevin Costner quote above really does cover it all. The company's official long-term strategy statement says the same thing in different words:
"Netflix is a global streaming entertainment service offering movies and TV series commercial-free, with unlimited viewing on any internet-connected screen for an affordable, no-commitment monthly fee."
If Cintas and Starbucks stomped the market over the past decade, Netflix made both of them look glacial by comparison:
...and Netflix did it all with the same unwavering focus on improving the user experience. That's really all you need to know about Netflix. It's one of the simplest business models I know, and it belongs in every long-term investor's portfolio.