While there are many ways for investors to achieve solid stock market returns, The Motley Fool recommends owning high-quality stocks for at least five years (and ideally longer). Seeking companies that have some sort of competitive advantage, like economies of scale or network effects, is a good plan of attack.
But I think investors can keep things very simple by only considering businesses that sell a superior product or service than what rivals offer. This is a strength that doesn't get discussed enough, and it's a characteristic that can take your portfolio to new heights.
If you want to improve your investing skills in one easy step, keep reading.
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Unwavering commitment to the customer
Thanks to an unlimited number of choices, coupled with the fact that information flows so freely because of the internet, consumers have more power than ever in today's economy. Management teams that relentlessly obsess over what their customers want and need have a serious edge over the competition.
Jeff Bezos, founder and previous longtime CEO of Amazon, said it best when describing his company's strategy: "We're not competitor-obsessed, we're customer-obsessed. We start with what the customer needs and we work backward." This certainly seems to be working, as this e-commerce, cloud computing, and digital-streaming juggernaut is one of the most successful corporations of all time.
Remember that customers are the ones who bring in revenue for any business. This is a fact, so for a company to not put this group above everything else is outrageous. Ultimately, profit, cash flow, and most importantly, shareholder returns, will follow.
A treasure hunt shopping experience
Investors don't even have to focus on the high-flying technology sector to start utilizing this portfolio strategy.
Take warehouse-club operator Costco (COST +0.35%), for example. This simple and easy-to-understand company has an unwavering commitment to taking care of customers. Its 818 warehouses offer up everything from groceries and electronics to apparel and appliances at some of the lowest prices around. Costco also encourages frequent visits thanks to its treasure-hunt shopping environment, with the chance to find great deals at any time. And these huge stores attract people trying to manage their entire shopping lists in one trip; something that was never more apparent than during the past 18 months.
Consequently, Costco has been absolutely shining as the pandemic still goes on. Revenue growth in each of the past five quarters has been in the 12% to 22% range. For a business that did greater than $190 billion in revenue last fiscal year, to be able to expand at this clip is remarkable.
The ability to please customers has resulted in other competitive advantages for Costco, like its powerful brand and its economies of scale. Because the business focuses on its customers more than anything else, it's cemented its place in people's minds as the first place to shop for a variety of items. This has led to growing sales over time, which is why Costco is able to flex its bargaining power with vendors when it comes to sourcing merchandise. Again, it all starts with the customer.
From a consumer's perspective, the value proposition of having a Costco membership is more evident now than it's ever been. People want low prices, a vast selection, and a pleasant shopping experience; a trend supported by the fact that Costco currently has 61.7 million member households and a renewal rate in the U.S. and Canada greater than 91%.
I see no reason why this heightened consumer relevance won't be the case for an extremely long time.
What about Costco's stock?
If you had invested in shares of Costco a decade ago, you'd be sitting on an unrealized gain of 467%, easily crushing the S&P 500's total return of 349% during that time. And for Costco, this doesn't even include the sizable special dividends that management rewards shareholders with from time to time.
I firmly believe that the average investor would be far better off by adopting this simple, but effective, portfolio strategy. Look for businesses that are determined to improve the lives of their customers, and you'll be extremely happy.
