How do successful investors (not traders) view the investing universe? Are there any trends in the way they pick their investments?
Here are some insights distilled from the methods and writings of investment legends like Warren Buffett, Philip Fisher, and Peter Lynch.
- Stay within your circle of competence: You are best positioned to identify winning companies within your own field of expertise. If you work in retail, you are more qualified to decide if you should invest in companies like Walmart, Target, Best Buy, etc. than the latest bio-tech company.
- Look for Economic Moats: There are some companies that manage to be virtual monopolies in their area. These companies have, over the years, succeeded in building a “moat” around them to keep their competitors away. They have a durable competitive advantage. Some examples of competitive advantage are:
- Brand – Think Harley Davidson, Coke, BMW. These are brand names etched in the public mind as the best in their class. These companies can raise their prices on the strength of their brands resulting in deeper profits.
- High Switching Costs – When was the last time you switched banks? Or cell phone providers? Or cigarette brands, if you are a smoker? You get the picture here? Companies that have high switching costs can hold on to their customers a lot longer than companies that don't.
- Low Cost Producer – Companies that are able to make products and sell them at phenomenally lower prices than their competition automatically attract customers – lots of them. As long as quality is not compromised, of course. Walmart and and Dell have perfected this concept to a science.
- Secret – Large pharmaceutical companies with patents; companies that own copyrights, drilling rights, mining rights, etc. are pretty much the sole producer or service providers in their area. Again, these companies can raise prices without fear of losing customers, resulting in higher profits.
- Scalability – This is a product or service that has the potential to network or add more users with time. Adobe has become the defacto standard for publishing, Microsoft's Excel for spreadsheets. eBay is a great example of a user network. Each additional user to the network costs the company virtually nothing. The additional revenues that come in as the network expands go straight to the bottom-line.
- Quality of Management: How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of the company. The companies annual reports as well as newspaper/magazine articles are good places to get this information.
To wrap up, stay within your field of expertise, seek companies with durable competitive advantages, and ensure management running the company is honest and investor-oriented. You can glean a lot of insight into investing by studying famous stock market investors.