To many of us, the feelings of worry and angst about the possibility of suffering crippling losses when investing far outweigh the happiness that a market-outperforming stock can bring. For these kinds of investors, investing in lower-risk stocks can help ease the anxiety of investing. Companies with strong, nearly insurmountable competitive advantages and high returns on capital may not always sound like sexy investments, but you can normally rest a little easier at night.
If this kind of investing is more suited to your personality, these three stocks -- Waste Management (NYSE:WM), Nucor (NYSE:NUE), and Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) may be the right ones for you. Here's why.
Doing the dirty work
There are many tasks we do on a daily basis that we barely pay any attention to, and one of them is generating rubbish. These kinds of unconscious activities can make for great businesses because we don't think twice about throwing things out or the amount of money we pay to have trash hauled away. This gives waste handlers like Waste Management an amazing competitive niche. It also helps that there are immense barriers to entry in the waste-handling business such as getting a new landfill site approved or the capital obligations for recycling and refuse vehicle fleets.
Having all of these competitive advantages is one thing, but capitalizing on them is another. This is where Waste Management sets itself apart. The company has continuously looked for new and innovative ways to save on costs such as the move to convert large portions of its waste-handling trucks to run on natural gas -- and use the natural gas produced in its own landfills. These kinds of moves are why Waste Management has some of the best returns on capital employed in the waste-handling business.
Those high rates of return have also allowed Waste Management to be shareholder-friendly, paying an ever-increasing dividend for 16 years straight and reducing its shares count by 27% over that time. Those kinds of slow and steady returns in a high barrier-to-entry business are a great lower-risk investment to consider.
Disrupting the steel business, 30 years in the making
Steel and steel manufacturing has been one of the backbones of industrial production for over a century. For many companies in this business, though, not much has changed over the past 100 years, and that is what gives Nucor a leg up over so many of its peers.
A wide majority of steel is manufactured in blast furnaces, which are massive plants that use coal to heat huge vats of steel and produce large quantities at constant rates. Nucor, however, employs a different technology known as electric arc furnaces. These furnaces don't require coal, can be efficient on a much smaller scale, can be switched on and off relatively easily, and can manufacture steel from both iron ore and scrap steel. This operational flexibility has given Nucor a much greater ability to control its costs compared to competitors that don't have the same kind of nimbleness. It's no wonder, then, that the company has been able to remain solidly profitable over the past decade while its peers have lost money for years thanks to low steel prices.
Steel may be a volatile commodity, but it is one of the essential materials for construction and manufacturing that will remain in demand for decades to come. Nucor is a nimble company that can react to the ups and downs of the market and remain profitable through good times and bad. An investment here, therefore, is a pretty low-risk one because you know that management is working to mitigate your risk in a volatile world.
Speaking of being in good hands
There are so many unpredictable events in the world of investing that give it a certain amount of risk, but having a management team that can effectively react to those situations is one of the best ways to mitigate that risk. With that in mind, is there anyone else you would entrust with your money than Warren Buffett? After all, Berkshire Hathaway has done a remarkable job over the years of beating the market through shrewd investing decisions.
Take, for example, the decision to buy railroad company Burlington Northern Santa Fe in late 2009. At the time, the nation was still in the depths of the recession and rail was struggling to generate profits even before the recession set in. Since then though, the company's net income has more than doubled, and -- of greater importance to Buffett -- has routinely thrown off billions in free cash flow that can be used to make other investments and acquisitions.
There is no certainty that Berkshire will continue to beat the market in the way it has over the years -- Buffett will even admit as much -- but let's face it, he has a pretty good track record. With a diversified revenue stream and one of the best investors in the business at the helm, Berkshire Hathaway makes for a pretty low-risk investment that can be held for a long time without much worry.
The Motley Fool owns shares of and recommends Berkshire Hathaway. The Motley Fool owns shares of Waste Management. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.