Today's duel boils down to whether it's better to sacrifice a bit of growth for stability, or swing for the fences in the quest for the next home run stock. I recently argued that it's first important to focus on preserving one's capital before trying to earn a satisfactory return in the stock market. This can be done by focusing on investing in companies that lead their industries and also possess a number of other appealing investment characteristics. Microsoft (NASDAQ:MSFT) is such a company.
The Motley Fool refers to this approach as Rule Maker investing, and if you run down the list, you'll find that Microsoft fulfills a number of the criteria, including a leading brand, strong historical performance, and a profitable business capable of throwing off prodigious amounts of cash. It gets a little hazier when determining whether the company will be able to grow enough to become a successful stock for buy-and-hold investors.
Alyce is arguing that Microsoft is a has-been and will continue to lose share to rivals that pursue open-source operating systems such as Linux and increasingly retrieve applications and store data over the Internet. She also sees the company's new product initiatives as copycat versions of market-leading products, be it Apple's (NASDAQ:AAPL) iPod, Sony's (NYSE:SNE) PlayStation, or Google's (NASDAQ:GOOG) online search-and-advertising business model.
My argument is that Microsoft's Windows and Office products are far from declining into oblivion. And just in case competitors end up stealing significant share, Microsoft is proactively muscling into their territory. It's taking on Google and Yahoo! (NASDAQ:YHOO) through its MSN online network, Sony and Nintendo through its Xbox gaming system, and Apple through its Zune music player. And it's close to profitability in most areas.
Few technology firms have as dominant a cash-cow business with which to fund new business endeavors. I mean, how many other companies are able to invest more than $6 billion annually into research and development, and throw off more than $10 billion in annual free cash flow? I'll stick with this Rule Maker and don't mind letting other firms develop new platforms for Microsoft to build upon, which is just what the competition is doing in operating systems and office applications.
Consumers may end up winning the most, but investors can end up with at least some of the spoils.
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Fool contributor Ryan Fuhrmann is long shares of Microsoft but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
