Choosing which stocks to invest in can cause what some call “analysis paralysis,” meaning you analyze each company so much that you end up choosing none, or missing out on potential great buys. There are, however, a few timeless characteristics that great investments always seem to have, regardless of the company, industry and current economic conditions.
To help discover how to pick winning stocks, i've created a list of 5 vital characteristics of winning companies that provide better chances of awesome returns. Do these characteristics guarantee your investment will be a winner? Absolutely not. But when approached properly, your winners over time outweigh the losing picks, and offset the returns in your favor.
5 Characteristics Of Great Stock Investments
Each of these characteristics have been found in top investments over the years. Companies such as Amazon, Facebook, Microsoft, Google, Netflix and many others are examples of companies that made many people wealthy who believed in their vision from day one. These characteristics don't necessarily mean you've found a winner, but rather serve as indicators of potential winning companies worth doing more research in.
1. Visionary Leadership Team
A visionary leader is a great indicator of a company that may be paving the way for the future of their market. A great example of a company with a truly visionary founder is Apple's CEO Steve Jobs. What some people called crazy, Steve Jobs saw as opportunity and vision.
A visionary leader isn't just one that has his own vision or fantasy of a different world, they are great teachers in showing others and helping them see their vision of what could be.
How do you know if a company has a visionary leadership team? With a little bit of research you can find out a lot about the founders, CEO's and executive team of a company. First off, do a basic google search on the company CEO and executive team to get to know some recent news and stories about them.
Other websites such as Forbes.com provide annual reports of the top CEO's of companies and why they are named the top CEO's. You can also use Glassdoor.com to see real reviews of the CEO from employees themselves, which is a great indicator of how good of a leader the CEO of the company is.
2. A Healthy Balance Sheet
This may seem obvious to some, but you'd be surprised at how many people get this one wrong. A healthy balance sheet indicates that a company is logical and strategic in how they manage their money, and more importantly, your money.
An easy way to look at a balance sheet is to compare the balance sheet as if it were an individuals finances. If an individual had debt that was well over the amount of total cash on hand, I think we'd all agree that this individual has some work to do and poses a potential risk for bankruptcy.
Things to look for on a balance sheet are how much cash a company has on hand, how much long term debt the company has, and how have these numbers been growing or shrinking over the years. The higher the cash on hand, the better, and the lower the debt, the better.
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3. A Competitive Advantage Or Industry “Moat”
Think of a large castle that has a large river or major barrier in the way of getting into the castle. Often a bridge is required to be lowered before entering the castle to begin with. This is a “Moat”, and is a great metaphor for explaining what a profitable company as an investment carries.
Does the company have a clear “Moat” or competitive advantage, making it difficult for other companies to compete or enter the market? Common moat's are:
- Sticky products: Products that are difficult for customers to leave and switch to the competition. Facebook is a great example. Anyone thinking of closing their Facebook account for a competitor? Most likely not, because no one is using the competitors product.
- Patents: Companies often purchase patents on products or services that make it difficult for competition to come in and try to capture their market share. This is a great moat that serves as a barrier of entry to the competition.
- Financial barriers: Some companies or industries have spent years breaking through regulation issues, financial burdens, and other restrictions to finally break through to their market. The companies that have passed these barriers and begin thriving in their industry are great investments, because chances are that the competition who is looking to enter the market may be years behind due to the regulations, financial obstacles and restrictions of entering the market.
- Brand Strength: A well recognized brand that is won the trust of the market is a difficult obstacle for a competing product to overcome. Take companies such as Apple, Tesla, or Lululemon for example. Both are premium products that clearly have a positive brand name that would be hard for a competitor to beat.
4. Growing Market
A great company with no market to sell to is as good as if it never existed. The exact opposite is also true. A great company with a growing market poses a prime investment opportunity. What are indicators of a growing market?
To start off, some basic research online can help get you to a great start in determining trends. Just search “current trends in the technology industry” or something similar. Then, do some further research on what you find out. Other places to watch for growing trends is Google Alerts, social media trends on Facebook and Twitter, and major news publications that are getting a lot of attention.
Great places to look are for growing trends are also on major business publication sites like Forbes.com, Entrepreneur.com and Investors Business Daily at Investors.com. Each provide great insight on potential trends and growing industries.
5. Company Culture
Just as important, and if not more important, than how a company treats its customers is how the company treats it's employees. The employees are the goose that lays the golden eggs, and if not properly nurtured a great company with an awesome product can still be a complete failure. And, the opposite can also be true; a company with a mediocre product but a great company culture can be a wildly successful investment.
Doing some quick research on job board websites on employee reviews of companies is a great indicator of how employees feel about the company culture. Places like Glassdoor.com are great starting points. Other indicators of positive company culture is looking on Forbes top companies to work for lists.
It Only Takes A Few Great Picks…
Do these characteristics guarantee a great investment? Absolutely not. They serve as starting points to do further research on a company to determine if they fit your investment requirements and risk tolerance. The more of the above characteristics you can find in a company, the greater the indicator of doing more research on the fundamentals is.
When all is said and done, it only takes a few great picks to make a wildly successful investment portfolio, and these indicators will tip the odds of picking great stocks in your favor.