If you want to be a wildly successful investor, you'll need to invest in wildly successful companies. (Or mutual funds, or apartment buildings, etc.) But zeroing in on the most promising companies is easier said than done. A favorite method of mine: Build a list of wonderful companies, then watch for their stocks to fall to compelling levels.
To help you determine whether 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. American Express
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 Abbott Labs
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 largely qualitative, but that doesn't mean you can't ferret out some useful impressions and information. Learn to spot good leaders with Foolish articles such as "Identifying Effective Management" and "Investigative Investing."
5. A lasting competitive advantage
Think of Time Warner
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 Medtronic
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 investing service. To date, their picks are beating the S&P 500 by more than 40 percentage points.
I encourage you to take advantage of a free trial of the service. It'll give you full access to past issues, and you'll be able to see the entire list of recommended stocks and their subsequent performance.
This article was originally published Sept. 15, 2006. It has been updated.
Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola and Time Warner. Coca-Cola is an Inside Value recommendation. Time Warner is a Stock Advisor pick. The Motley Fool isFools writing for Fools.
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