Despite the tumultuous market conditions over the past several years, I have been able to regularly pick winning stocks in a reliable fashion using an unorthodox approach that I will be sharing with you below.
Aside from the basic metrics, I tend to ignore guidance, projections, and other estimates. Understand this: there are thousands of highly paid professionals who are looking at financials, charts, and production numbers. These professionals go on to make estimates about a stock’s earnings and future growth. The numbers have already been calculated and are widely available for public use. Too many individual investors think the key to beating the market is to crunch the numbers better than the experts by reading books that contain formulas for stock analysis and then applying these formulas. The reality is that these very same individuals are never, ever going to out-calculate the major institutions.
It dawned on me at the very beginning that picking stocks based on the numbers alone is a loser’s game, at least if you have any hopes of beating the market average by a substantial margin. If we are going to make big returns on our investment, we have to play a different game with different rules. We have to take advantage of knowledge that we have in our own individual lives that is otherwise not available to major institutions or traders.
Rather than looking at numbers, my strategy can be boiled down to picking a profitable company with the best product in a sector that has the potential for growth (either by general sector growth or other factors as discussed below). The idea behind this strategy is if you pick a winning company that is already profitable that stands to grow from some future event, the stock price is bound to go up significantly regardless of market conditions. While the price of a stock may lag a bit based on a company’s earnings, the price will eventually correct itself and you will make you return.
Based on this theory, I have created my own set of simple conditions and rules for picking winning stocks that has served me very well over the last few years. Below, I will share these rules with you.
Profitability (or Indications of Near Future Profitability)
This is one of the few traditional factors I like to look at when evaluating a potential stock, especially in the tech field. I have a hard time buying stock in any company that has yet to turn a profit. People seem to think they have to get in while the company is undiscovered, but this sets up the investor for unnecessary risk with limited upside.
If you have a good understanding of the product or service a company is offering, it is easy to predict if that company will grow. However, if this company never was profitable to begin with, growth might not ever necessarily lead to profit. Now if a profitable company grows, a stock’s price will increase by leaps and bounds. A stock’s price tracks closely to earnings, so by waiting on the sidelines until a good company becomes profitable, you still be able to stick around for most of that stock’s growth.
A good example of this practice in action is with Tesla Motors (TSLA). This was a very interesting company with a proven CEO and a great product, but the stock was stuck under $40 for the better part of 2 years. Even after the Model S came out and went on to win a variety of accolades, the stock was still stuck under $40. Once they announced that they turned their first dollar, the stock jumped to $45 a share, then took an enormous run up to $180 a share in about 7 months’ time.
The difference between buying TSLA at $34 and $45 is not significant when you consider that the stock went on to crest $180 a share. What is significant though is that when you were holding TSLA at $34 a share, there was a very real chance that the company could have gone bankrupt and you would have lost all your money. If you bought TSLA at $45 after they turned a profit, then there would be very little risk of losing all of your individual investment, but you would have still bought the stock at a low enough price to reap a huge return.
A company that makes no money always has the risk of going out of business, no matter how compelling the product. By waiting for them to turn their first profits, you still are able to catch most of the growth without risking losing your entire investment.
When to Ignore Profitability
On the rare stock, I ignore the profitability of a company, but only for one of two reasons: they are spending large amounts of money on infrastructure or technology that will lead to future profits, or their earnings and revenue are on a huge upswing.
For example, take Amazon (AMZN). They invest almost all of their earnings into infrastructure. Fulfillment and shipping centers are popping up all over the country. Kindle Fire is sold at a huge discount to give Amazon a larger buyer base for its eBook and media offerings. I am okay with Amazon making very little money and posting the occasional loss because they are using their money to drive future growth and profits.
An example of the latter reason for ignoring profitability (losses are decreasing quarter over quarter as revenue increases), consider Yelp (YELP). In the quarter ending in March 2013, they posted a loss 4.8 million dollars on 46.1 million in revenue. In June of 2013, they posted a loss of .88 million dollars on revenue of 55 million dollars. As I am writing this, Yelp still has not turned a profit, but they will next quarter (or in the very near future). The run in the stock price reflects this reality. You do not need to sit on the sidelines and wait for profits here (as long as the stock fits the other categories well).
Is the Stock Best In Class?
We have finally gotten to the point where the individual investor can out-wit the major institutions and traders of the world by using knowledge that is simply not available to the “big boys”. Here is why:
- When a professional money manager decides which company is best in class, they are looking at the balance sheet. The company with little to no debt that has the best growth rate versus their price to earning ratio is almost always consider the best in class stock.
- When a consumer decides which company is best in class, they are looking at the product. If one company has a far superior product to its competitors, then the consumer would consider the company with the best product to be the best in class. I encourage you to be product driven. Big money managers cannot be product driven due to the fact that they cannot possibly be consumers of every single product in existence. Additionally, when you consider that the salaries for stock-picking TV personalities are enormous, these high paid individuals simply do not use every day products due to their vast wealth.
My favorite example of this is in regards to Chipotle. A major player, Jeff Gundlach, famously stated that “a gourmet burrito is an oxymoron” and then proceeded to pound on his chest about why Chipotle needed to be shorted. YUM will destroy it with their Cantina Bell menu, he said. Anyone can start a taco truck that is better, he said.
Of course, anyone with taste buds just needed one taste to know that Chipotle was indeed different than other burrito vendors. A rich person who never dines on fast food has no way of knowing this. The average person who eats out once or twice a week has likely tried Chipotle, Baja Fresh, Qdoba, Moe’s, and any other similar restaurant depending on their location. Because of this experience, the regular burrito connoisseur knows that a Chipotle burrito simply blows away all fast food and fast casual competition. Furthermore, individuals without an unlimited budget will actually pay attention to the price of their food. While I will not deny that food trucks are often tasty, they cannot compete with Chipotle on the price point. Buying in bulk lets Chipotle get high quality meat and cheese for lower prices. The food truck would have to deliver smaller portions or low quality ingredients to compete on price. A rich person might not consider that a $7 burrito from a food truck that does not fill one’s belly for the evening may not exactly be a value for the average consumer who relies on the larger portion size from Chipotle to save elsewhere on their groceries.
Use your own personal knowledge. A realtor knows Zillow is better than Trulia and both are dominating traditional MLS organizations. A foodie knows that Yelp is the best food review site. A digital marketing expert knows that Bing/Yahoo never will challenge Google for search engine supremacy. The major market movers will never be able to have knowledge about these specific areas.
Does the Stock Fit the Direction of the World?
To paraphrase Gary Vaynerchuk, the direction of the world is only one way: forward. Things never go backwards. Knowing the direction of world involves being a realist. To paraphrase Robert Greene, do not confuse being a realist with being a pessimist. A realist is someone who objectively looks at the world without bias or preconceived notion. A realist has a firm connection to the real world and one’s own environment and as a result has a keen sense of any changes that may be rippling through the undercurrent of that segment of society.
As an example, consider BlackBerry (BBRY) and its recent foray into the smartphone market with the BlackBerry Z10. I wanted to shout at my TV when you had so-called experts this phone and declaring it was a potential iPhone killer. Really? People are going to just stop buying new models of the iPhone for a new sidegrade (if not a downgrade) from BlackBerry? Because they used to use BlackBerry? It was never going to happen, and the stock price’s tumultuous fall is evidence of that reality. Things only go forward. It can be tempting to reminisce over the way things used to be, but the expression is “out with the old, in with the new”. Out with the new and in with the old is a nonexistent scenario. The Z10 never had a chance.
This is by far the most difficult part of stock analysis, yet is the most important part of my stock picking manifesto. This is the one area where you as the individual investor (the “little guy”) have an advantage over the numbers alone for the same reasons we discussed in the “best in class” section.
Here are three simple questions to ask that help break down this good stock requirement into more tangible terms:
- Is the stock in a growing sector?
- Does the stock fit the zeitgeist (spirit of the times) of the current (or future) age?
- Does the stock stand to benefit from changes happening elsewhere in the world?
If the answer is a yes to any of these three questions, the company you want to invest in is profitable, and this company has the best product or service, it is a buy. If the answer is yes to two or three of these questions, the company is profitable, and the company has the best product or service among its competitors, then the stock is a strong buy.
Answering the first question is easy: is the stock in a growing sector? An example of this would be any company that produces smartphones or provides smartphone service. Growth in a sector alone is not enough, a company needs to be best in class as well (as mentioned earlier). To repeat a previous example, a growing sector alone was not able to support the BlackBerry Z10. The product was not best in class, so it was ignored by the public as it should have been.
The second question is a bit tougher but is as equally important as the first. Consider that over time, the tastes and interests of society will inevitably shift. The summation of the interests, tastes, and beliefs of a people of a certain time is termed the zeitgeist. By observing these trends, we can pick stocks that stand to benefit from these changes. These stocks may grow faster than projected and as a result generate bigger turns than expected if they are aligned with the zeitgeist of the current or upcoming generation of consumers.
Let’s use the previously used example of Chipotle as an example of how a changing zeitgeist can improve a company’s and ultimately a stock’s performance (and how it may blindside biased investors). Take a look at the food space overall. People are always interested in buying food, so you cannot exactly say that “restaurants” are a growing sector. Sure, when economic conditions are good, people are more likely to eat out, but the growth of the restaurant and fast food industry is not comparable to growth in internet or smartphone usage.
While the growth of the overall sector has not changed, what has changed is the zeitgeist of our population in regards to the foods we want to consume. There has been a growing interest in sustainability, organics, humanely-raised meat, and the avoidance of hormones in the raising of animals used for meat. People are willing to pay more for food that that adheres to these conditions. This is relevant because just 20 years ago, this was only a selling point among a fringe group of “old hippies” and “granola girls”. Jump to 10 years ago and the population interested in these topics had grown, but still was small. Fast forward to today and pop culture phenomenons like Fast Food Nation and An Inconvenient Truth have spawned a new generation of individuals interested in conservation, sustainability, and treating animals raised for meat humanely.
Understanding trends in the psychology of the overall population requires no degree but rather an open mind. You have to separate yourself from your own biases. As an individual, you might think that global warming is a myth (a naive position, but I digress). You might not care about genetically-modified organisms (GMOs) or hormone usage in the raising of animals or whether those animals are treated humanely. You are entitled to your own opinion, but ignore the opinions of others are your own risk. While individual opinions tend not to change over the course of one’s life, the oldest generation will eventually die and today’s youth will eventually take their place as adult consumers. This new generation will undoubtedly reject certain tenets of the old generation. You will live through several generations of change. Invest in accordance!
The third question relies on specialized knowledge and is not a necessity to invest with my strategy (a yes on question one or two is enough to make a stock a buy as long as the other conditions are met), but it can pay off big returns if you possess this knowledge. By using very specific knowledge about a changes in given area of interest or field of work, we can try and predict which companies stand to benefit from these changes. It requires a leap of logic, but as such, it is information that is simply not available to other investors. Here is a very specific example from my own life and experiences:
My real life job is in digital marketing. It is in my best interest to follow the search engines closely. Google recently significantly tweaked their algorithm (once in September 2013 and another time in October 2013) in a way that favored authority sites. An authority site is a very large site that covers all aspects of a niche or space. An example of this would be something like Wikipedia, The New York Times, CNN, Amazon, etc. Authority sites are almost always household names.
The recent tweak in the algorithm has boosted the rankings of these authority sites across the board. An increase in rankings means an increase in traffic. For a company that relies on visitors from Google search results to sell products or generate advertising revenue, this could translate to a sudden spike in revenue. Quarterly earnings could demolish expectations with a tweak like this one in a site that is largely driven by natural traffic from Google.
There are many public internet companies that generate a large portion of their traffic from Google search results. The two most prominent examples of this are Zillow and Trulia, the two huge real estate sites. These sites are up in a big way in the search results, so I expect a jump in revenue for both of these companies in the near future.
The reason this knowledge is so effective is due to the simple fact that this is not considered by stock gurus. They simply do not have time to track changes in the search algorithm. They might not even realize that Google results are generated by a very complex algorithm that is constantly tweaked to improve results (the vast majority of the population is unaware of this). Stock gurus assume growth is steady over time and related to past growth, not knowing that each time Google’s algorithm is tweaked that a dependent company’s revenue could dramatically rise or fall.
This is my specialized knowledge, but perhaps you have your own in your own field. I have a friend in construction who mentioned that they were expanding a local port and that many shipping distribution and companies were going to benefit in a big way from this change. Investing in those companies could be the right play if other conditions were met.
Think outside the box here. You do not need to get your information from work. Imagine you were a female Yoga enthusiast and you encountered your first pair of Lululemon yoga pants and you knew immediately the superiority of this product. This could be your specialized knowledge. Most stock analysts are men, so picking winners is difficult for investing firms when it comes to women’s consumer goods. Men can take advantage of this phenomenon too by keeping an eye on the products their girlfriends, wives, daughters, sisters, or coworkers are using. It just requires an open mind and keen observation of the outside world.
Real Life Companies that Meet These Criteria
Theory itself is useless until it is applied to the real world. Below, I have laid out several companies that exemplify the virtues I am looking for when deciding on an investment. We will see how each company applies to my three checkpoint system:
The perfect stock that exemplifies these virtues is Google (GOOG). Here is how it fits into my model:
Is it Profitable?
Yes, very much so. Google has great earnings and is growing these earnings at a consistent pace.
Is it Best In Class?
When it comes to their search engine, their video platform (YouTube), and their ad network (Adsense and Adwords), Google is far and away best in class. There are no true competitors to Google in any of these arenas. Forget about Android vs iOS vs Samsung – even if Google loses the mobile war, all those smartphones will be still using google.com for search and YouTube for video consumption.
Is it Aligned with the Direction of the World?
Yes, in many ways. First, Google is active in growing sectors. Every day more and more people turn to Google’s search engine to find information. Additionally, the proliferation of broadband has resulted in the continued growth of YouTube as the premier platform for watching user-created video. Finally, Android itself is the operating system of choice for low-end smartphones, which are very popular in emerging markets.
Google by definition fits perfectly into the zeitgeist of our time. Their model of giving away most of their services and software for free fits with the future of business. Consider products Gmail and Google Maps. Google generated large user bases by offering these services for free and then leveraged their huge ad network to monetize these platforms over time. Google is also a very “cool” company and is featured regularly in movies (The Internship among others) and pop culture.
As mentioned earlier, Google also stands to benefit from changes in other fields. Namely, as more people get access to high speed smartphones and broadband becomes more widely available, more and more people will be performing searches on mobile phones and consuming video content. Google already is best in class in both of these areas. Even if Samsung continues to make most of the profits off of Android phone sales, Google still wins because all those users are monetized each time they search on Google, visit sites displaying Adsense, or watch YouTube videos.
Chipotle (CMG) is another great stock (despite its high price per share) simply because it embodies these principles better than any other fast casual dining establishment.
Is it Profitable?
Despite opening up a large number of new stores each year, Chipotle has been profitable for multiple years running. Its profitability on its total revenue has caused concern among some investors, but I think this is overplayed due to its growth potential.
Is it Best in Class?
Absolutely. No other fast-casual Burrito joint holds a candle to Chipotle. There may be a few people out there who prefer Qdoba or another venture to Chipotle, but understand that these people are in the vast minority. This is not merely my opinion – the line at lunch time and dinner time at Chipotle is evidence enough.
Is it Aligned with the Direction of the World?
Definitely. While we cannot say that the sector is growing faster than average, we can say that the fast-casual subset of restaurants is growing faster than average. People simply want higher quality and tastier food and Chipotle delivers on this desire.
Furthermore, the new generation has an interest in sustainability, organics, hormone-free meat, and humanely raised animals. Chipotle advertises all of this in both its stores and on its commercials. While most of the older generation may not see this as a selling point, but each year the number of young and middle-aged adults with these beliefs increases.
Amazon is another great company that exemplifies all of these desirable traits in a good stock investment.
Amazon has yet to turn a major profit, but that is only because they invest so much of their money back into the business. I would rather have this dynamic continue rather than see the company issue dividends or buybacks. This is still a growth stock with major growing left to do. Despite its recent run up in price, AMZN still has a much smaller market cap than Wal-Mart (WMT), indicating there is still a lot of growth left for AMZN.
Is it Best in Class?
Absolutely. No other e-commerce or eBook vendor comes close to Amazon. These are Amazon’s two core products. The only real competitor in e-commerce to Amazon was Zappos, and Amazon bought Zappos at a premium.
Is it Aligned with the Direction of the World?
Absolutely. As stated earlier, everything is moving one way: forward. The way forward means a continued rise in e-commerce and a continued decline of the brick and mortar retailers. It means an increased consumption of digital media (i.e. eBooks) and the continued decline of of bookstores. Amazon is the #1 e-commerce store and #1 eBook store and it has no real competitors in either market. The eBook space is particularly lucrative because there is no printing, shipping, or distribution costs.
About the List
Some people might look at the list and say that this list only contains relatively new companies, and that new companies do not seem to last very long. It is hard for an old company to embody these principals due to the fact that the world is always changing while older companies are generally geared for the present (or even past). Understand that the digital and internet revolution is perhaps the biggest change our society has ever experienced. Its influence is at least as great as the industrial revolution. The internet is changing everything about the way we do business. Companies will need to adapt or fade into relevancy. Amazon, not Wal-Mart, is the new #1 of commerce. In 10-15 years from now when e-commerce revenues rival retail and Amazon is larger than Wal-Mart, the market caps will reflect that reality.
Popular Companies that Do Not Embody These Principles
By definition, if we are to beat the market average, our stocks will have to perform better than the average stock. As a result, most companies will not fit these criteria. Here are some examples:
Hewlett-Packard (HPQ) has had a nice run over the course of 2013, but this is not a stock I would want to own.
Is it Profitable?
Sometimes. Over the last 3 quarters at the time of this writing, HPQ has turned a decent profit. However, the previous quarters resulted in heavy losses.
Is it Best in Class?
Not a chance. One of Hewlett Packard’s main problem is they are not winners in any of their product lines. Their laptops and desktops are considered inferior (at least on a price point) to ASUS, Lenovo and Acer models. Perhaps they might be considered to be at the top for home desktop printers, but printing is an area of rapidly decreasing as more and more documents move and stay permanently online.
Is it Aligned With the Direction of the World?
HPQ is one of the faces on the Mount Rushmore of declining old tech giants. Their core business is still printers, desktops, and laptops. The first two in the list are on a major downturn, while the laptop market is considered to be flat (if not slightly negative) on its best day. The average consumer is not replacing their desktop PC and instead buying new models of smartphones and the latest tablet.
One area where HP is trying to re-orient themselves is in the business services sector, but they are not quite there yet. If HP could be a major player here, the company could be interesting, but I’m certainly never going to invest on that hope. The market cap is already inflated due to revenue from their dying PC, printer, and laptop business. It would make more sense to invest directly in a low market cap company that offers cloud hosting or business services exclusively and is the best in that area rather than be dragged down by their core business.
Microsoft (MSFT) is a stock that has languished for years, but in the mean time has produced steady dividends even during tumultuous times. However, now more than ever, I believe Microsoft is facing its greatest danger yet as it is facing its fiercest competition ever for its three major money-making consumer goods.
Is it Profitable?
Yes, Microsoft is very profitable. It has been able to turn a steady and consistent profit for many years due to the continued use of its core product offerings.
Is it Best in Class?
In some areas, but not in others. The problem is that its latest efforts have all been major failures. Windows 8 is a disaster. Windows phones and tablets are all currently a disaster as well. Microsoft Office and X-Box are perhaps the only major consumer products where Microsoft leads the market, and X Box is near the end of its generation life cycle.
Is it Aligned With the Direction of the World?
This is where Microsoft really fails. They are an old company that has fallen behind in the times and as a result stand to suffer greatly for it. The first sign was that MSFT missed the boat entirely on the mobile and tablet market. Not only did MSFT miss out on the opportunity to sell these devices, but also on the opportunity to get their trademark Windows software onto these phones and tablets. Most phones and tablets either run iOS (Apple’s operating system) or Android (Google’s operating system). Windows is left out in the cold. Microsoft has tried to respond by producing their own phones and tablets, but consumer interest in these products has been very low.
It’s not necessarily that Window is bad, it is just that Windows primarily sells on desktop PCs and laptops, and sales for these items are declining rapidly (in the case of desktops) or at best stagnant (laptops). Combine that with the fact that Microsoft’s X-Box One announcement was poorly received and that each year Google’s free version of Excel and Word is becoming more popular with each passing day, it is easy to see that the future outlook for Microsoft’s stock price is grim.
It is finally time to take a look at a traditional blue chip stock and how it fits into this system. I do not want to own McDonalds stock as a long term investment simply due to the fact that it does not fulfill my criteria for a good stock investment.
Is it Profitable?
Yes, very profitable. However, profitability alone is not going to going to generate market-busting returns. Stocks with big profits tend to have high market caps, and if you want to capture growth, you need growing profits. McDonalds is not well-positioned for unanticipated growth.
Is it Best in Class?
If you are a stock analyst and you are looking at the balance sheet, this stock is best in class. If you are a consumer looking at the end product, the answer is a definitive no. To put it bluntly, McDonald’s food is disgusting. A Hamburger from McDonalds does not compare to Five Guys or In-N-Out. Even their fast food chicken sandwiches do not stand up to a place like Chick Fil-A. Their smattering of “healthy offerings” pale in comparison and value to Panera, Chipotle, and other fast-casual chains. A grilled chicken Snap Wrap from McDonald’s not exactly steal at $3.99 when you consider it is about 1/3 the size of a Chipotle entree item that ranges from $6-$7.
McDonald’s has no product where they “win” in the overall market. The market has reflected this: domestic McDonald’s growth has been stagnant. McDonald’s primary growth driver is overseas, where better options do not exist (yet).
Is it Aligned With the Direction of the World?
Another area where McDonald’s struggles. McDonald’s offers low quality fast food in an era where the public at large is showing a growing interest in both health and flavor. McDonald’s has a reputation for being particularly unhealthy and its food preparation practices are known to be unsavory, from the type of ingredients used in the beef and chicken nuggets to the way in which the animals are raised and slaughtered. The epitome of this is McDonald’s resistance to removing trans fat from its food. This fat is a known carcinogen and considered highly toxic to the human body. Other countries have banned its use entirely. It is a fat (oil) that does not spoil very easily, so McDonald’s has refused to remove it despite the fact that it is toxic to the human body. They show no regard for the interest of the consumer in a world where companies have to treat their customers more like clients every day to remain competitive.
Perhaps McDonald’s best move in the last 20 years was the introduction of their premium coffee line. McDonald’s saw the success of Starbucks and other coffee chains and added their own line of premium coffee drinks. These are huge sellers for McDonalds with high profit margins. The problem is that while coffee is great for business, it primarily sells at breakfast time. If McDonalds can come up with another way to monetize lunch and dinner offerings, then this stock may be worth taking a look at.
Following and Re-Evaluating Your Investment Over Time
Just like the people that control them, stocks and companies can change over time. You should regularly re-evaluate your positions at a high level to make sure that the stock continues to fit these key principles. The market fluctuations of day-to-day, week-to-week and even quarter-to-quarter reports are looking at the business under a microscope rather than taking a look at the larger more meaningful picture.
For example, if Chipotle suddenly cheapened their ingredients to eek out extra profits and no longer had the best burrito, the stock could quickly become a sell. If some investing guru stated that rising corn prices could cut into Chipotle’s profit margin and the stock should be sold, it is not a sell. The rising corn prices of 2011 and 2012 did not change the fact that Chipotle still has the best burrito, is profitable, is aligned with the direction of the world, and continues to have plenty of room to expand. Those who sold on the fear of rising corn prices rather than the quality of the company missed out on large returns.
The month to month fluctuations in a stock’s price can be used to our advantage rather than our disadvantage. Know and understand which companies are winners based on the criteria outlined in this guide. When stock gurus announce that some temporary event is going to hurt a winning company in a big way (i.e. rising corn prices and Chipotle), foolish and fearful investors often sell out. Prices of great stocks can often tank significantly during these fearful times. Rather than give into the fear, take advantage of the lowered price to get cheap shares. Companies that fit into these guidelines will ultimately recover. As an example of this, I recently bought a large chunk of AAPL (large for me anyway) when it was hovering near $400. It did not take long for it to go back up around $500. It’s a great company that embodies these principals, but investor fear and negative press drove the price down.
Remember that this strategy only works when the beaten-down company is in line with the direction of the world. J.C. Penney is a prime example of when a beaten-down company is not in line with the direction of the world. This brick and mortar department store has been on a downward spiral for the last 5 years, but every so often a group of gurus will come out and say that the stock has finally dropped enough to where it is a value buy. After this announcement, the stock runs up for a month or a week, but then the downward slide continues when this positive sentiment inevitably fades. Sorry, but mall retailers have been crushed by e-commerce and the situation will only get worse over time. It is not the fault of the CEO or anyone else: J.C. Penney was doomed from the day it sat back while Amazon took over the e-commerce space.
How I Invest in Stocks: A Summary
An easy way of thinking about this system is to ask yourself this question before investing in a given company: where do I realistically see this company 10 years from now? A lot can happen in 10 years, so you need to be able to see a world where your stock of choice grows significantly and find it difficult to imagine a world where the company you invested in has faded into oblivion. For example, in 10 years I see Chipotle increasing its number of stores by 10-15% annually, I see Amazon continuing to take advantage of robust e-commerce growth, and Google to be by far the dominate player in advertising, a market likely approaching a trillion dollars in size by 10 years.
Even with all of this preparation, understand that in 10 years things often change far more than we could have imagined. Just 10 years ago, there was no such thing as a smartphone. Even regular cell phones still had not filtered down to the bulk of the population of industrialized nations. It is hard to say what the world will be like 10 years from now, so you should regularly re-evaluate your stocks to make sure that these companies are in line with the direction of the world.
Good luck. Remember to keep an open mind – there are investing opportunities all around the observant individual. Pay attention to the shifts and changing trends in the world and invest accordingly.