If you want to be a wildly successful investor, you'll need to invest in some wildly successful companies (or mutual funds, or apartment buildings, etc.). But zeroing in on the most promising companies is easier said than done. One way I like to invest is to build a list of wonderful companies and then watch for their stocks to fall to compelling levels.
To help you determine if the company you're looking at is a first-class operation you'd be proud to have in your portfolio, here are five hallmarks of great companies:
1. Powerful brands
Think of well-known brand names in the United States or, better yet, around the world. Coca-Cola
2. Significant products or services
Look for a company that's selling its customers something they really need or really want. Pharmaceutical companies such as Eli Lilly
3. Consistent, reliable earnings and sales growth -- and robust margins
Great companies grow steadily and find ways to get more and more of their revenue to the bottom line.
4. Strong leadership
This is in many ways a qualitative factor, but that doesn't mean you can't ferret out some useful impressions and information. There are some tricks to learn from articles such as Identifying Effective Management and Investigative Investing.
5. A lasting competitive advantage
Think of Disney
And then there's price ...
Once you've identified a great company, you may be tempted to rush out and buy shares at any price. Don't. High-quality companies often trade at premium prices, and paying too much for a stock will hurt your returns. But if you're patient, you'll likely find one or more on sale every now and then. Some very successful firms trading at some not-so-high prices lately include Coca-Cola and Wal-Mart
Great companies at good prices. That's a recipe that can help you beat the market for decades, and it happens to be a good way to summarize the strategies that Fool co-founders David and Tom Gardner employ in their Motley Fool Stock Advisor investing service. And they're having some success. To date, their picks are beating the S&P 500 by more than 40 percentage points.
I encourage you to take a look at David and Tom's free report, "The Motley Fool's 2 Top Picks," which gives you two new stock ideas and further insight into their investing strategies, at no cost to you. Click here to access the report.
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This article was originally published Sept. 15, 2006. It has been updated.
Selena Maranjian owns shares of Coca-Cola and Wal-Mart and enjoys eating Whoppers Jr. at Burger King. For more about Selena, view her bio and her profile. Wal-Mart, Coca-Cola, and Intel are Motley Fool Inside Value picks. Disney is a Stock Advisor choice. Eli Lilly is an Income Investor selection. The Motley Fool isFools writing for Fools.