Investing in the stock market is one of the best ways to generate life-changing wealth. And even though it appears complicated at first glance, investing is really a simple endeavor. The key is to identify businesses with competitive advantages and solid growth prospects. Plus, it's essential to have a long-term mindset.
But while many financial experts and analysts can throw out a bunch of different variables to pay attention to in order to generate great returns, I think narrowing down this focus can be extremely beneficial. In fact, I think one of the most important factors to look for when buying stocks is antifragility.
Let's take a closer look at why I believe this to be the case.
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An unpredictable world
Nassim Taleb, a famous author and former Wall Street trader, is a thought leader when it comes to probability and statistics. He gained popularity for his 2007 book, The Black Swan, which discusses how the rarest and most unpredictable incidents, called black swan events, can have the biggest impact on our world.
Taleb wrote another book called Antifragile a few years later, in which he focused on things that actually get stronger from the craziness that happens in the world. I think these lessons can have direct implications for how people invest.
The world seems to be getting increasingly unpredictable. You don't have to look back more than a couple decades to understand this. Since the year 2000, there has been the dot-com bust, a tragic terrorist attack, the housing bubble, the Great Recession, unprecedented monetary and fiscal stimulus, a historic bull market, a deadly coronavirus pandemic, decades-high inflation, and potentially another economic downturn. There's no way that someone could have had the foresight to successfully navigate this from an investment perspective.
Owning the right businesses
Given that world events might be even more chaotic in the future, I believe it to be of the utmost importance to own businesses that show signs of being antifragile. To be clear, there is no metric that investors can search for in a company's Securities and Exchange Commission (SEC) filings that shows how antifragile it is. But I think there are some clear indicators.
Businesses that can handle whatever is thrown their way have a strong financial positioning first and foremost. They generate lots of free cash flow on a consistent basis, and they have a solid balance sheet that can weather a prolonged economic downturn. This is critical because companies that are losing money each and every quarter have a fixed runway before they need to raise additional capital or start generating profits. In other words, they are up against the clock.
What happens when these businesses are forced to turn to equity or debt markets at unfavorable times, not unlike what we've seen in the U.S. since early 2022? They'd definitely be in some trouble then.
Additionally, antifragile companies sell products and services that have durable demand, no matter what's going on with the broader economy. A lot of industries experience cyclical demand, performing well in robust economic times and struggling when consumer spending is under pressure. Because recessions are unpredictable, investors just don't know when these kinds of companies will see their fortunes take a turn for the worse.
The power of Apple
A fantastic enterprise that fits the antifragile description, one that could certainly handle a black swan event, is Apple (AAPL 1.36%). As of April 1, the tech giant had $166 billion of cash, cash equivalents, and marketable securities on its balance sheet. Moreover, it produced a whopping $56 billion of free cash flow in the first six months of fiscal 2023. It would be a challenge to find a company with that level of financial prowess.
Apple also sells some of the most sought-after products on the market. The iPhone is arguably the single greatest piece of hardware ever invented, registering $51 billion in sales in the last fiscal quarter. The Apple Watch and AirPods are extremely popular, too. The company's customer base leans toward affluent people, including high-net-worth individuals. These folks have the willingness and ability to spend on the latest tech hardware that Apple produces, even when economic times get tough.
And in recent years, Apple has done a wonderful job of expanding its services segment, creating a valuable high-margin recurring revenue stream for the business.
Investors should try to keep it simple. Seek out companies that can handle adverse situations extremely well. Apple is one of them.
