During a recent pitch, one of the attendees asked me, 'What should I do with my savings right now.' A reasonable question to ask a guy who spends his days studying financial markets, right?
You would think this would be a simple question to answer, but I have been at this for nearly a decade now, and I still haven't quite perfected the most frequently asked question. Unfortunately, there is no one-size-fits-all when it comes to investing. How I answer this question will ultimately depend on the individual's experience, finances, time horizon and risk tolerance.
But of course, starting my answer with "it depends" was likely to be met with uncontrollable eye-rolling and unbridled verbal abuse, so in an attempt to appease the angry mob (my recollection may or may not be somewhat exaggerated for dramatic effect), I neatly condensed what he needed to do into one simple sentence.
Buy great companies and hold them for a long time.
In reality, investing can be much more nuanced, but this is essentially the framework that all future investment plans should be built upon—the foundations of sound investing. No complex math, no fancy credentials required, Just common sense, optimism, and a lot of patience.
While I wish that I had the ability to conveniently pack the intricacies of investing into just one 10-word quip, the above sentence is rendered useless if you have no idea how to identify great businesses, so let's dive a little deeper.
Finding great companies can be as simple as opening your eyes. Your fridge. Your wardrobe. Behind virtually every successful product or service lies a publicly-traded company that's cashing in on that success. Through stock investing, you can join in on that success by purchasing a part of the company.
Many presume that stock picking is based solely on complex future cash flow calculations and ratio analysis. However, qualitative, common-sense metrics are just as, if not more important.
Here are some of the first questions I ask myself when analysing any business.
Will the company exist in 10 years?
This is the first question you should always ask yourself, If you can't answer this question with some degree of confidence, then it's time to look elsewhere.
Do I truly understand what the company does?
It's crucial to invest in companies you understand. If you do not have a solid understanding of how the company makes money, you will never have the conviction needed to hold it during the inevitable market dips.
Does the company have a competitive advantage?
When looking for a good investment, always look for a sustainable competitive advantage, a moat that will prevent competitors from entering the market and stealing market share. This protection can come in many forms, such as a strong brand, a patent advantage, network effects or proprietary IP.
There are hundreds of new startups emerging every day with new technologies that can threaten even the most established companies. Likewise, numerous mega-cap companies are looking to use their existing brand recognition and cash flow to penetrate new markets *cough…Amazon…cough*.
It's not always enough to have a great business, without an adequate moat, a company is unlikely to survive over the long run.
Is the business part of a growing industry or sector?
What changes will we see globally over the next 20 years, and what companies will be at the forefront of these future mega-trends?
Do you believe sustainable energy is the way of the future? Maybe you believe Robotics and Gene therapy trends will continue; autonomous vehicles are a given, and space tourism is on the horizon. Whatever your future view of the world is, you should focus your efforts on exploring companies that are set to profit from the societal shifts you believe in.
You'll find great investing ideas by reading up on the latest technologies and changing consumer trends but be warned; new technologies often get overhyped in the early stages. A more in-depth valuation analysis will be needed once you have identified these future industry leaders.
Does the business have a strong management team?
Strong leadership doesn't show up anywhere on the balance sheet but is vital when identifying a great company.
Is this still a founder-led business? Is management invested alongside you? What sort of company culture has management cultivated? Do they have a history of creating value?
If you stumble across a company that ticks all these boxes, odds are, you're looking at a great candidate for your hard-earned savings.