Knowing what to look for in a company can make or break your investment portfolio. Having a set of criteria to filter the hundreds of different stocks out there can simplify the selection process and enforce a systematic and consistent approach that allows you to predict future returns on investment. Here are four things that investors look for when choosing companies to buy.
As Warren Buffett, one of the most successful long-term investors, puts it, find companies that have an economic moat around them. Whether it’s a patented technology or mechanism, a company should have something that allows it to compete in its respective industry or sector. Other possible edges you can look for include low pricing, a better portfolio of services/products, highly experienced management staff, etcetera.
You’d want your prospective companies to operate in a decent-sized market for them to generate decent-sized sales and revenue, which ultimately drive returns on your investment. If you are shelling out a million dollars in a restaurant business with limited market size of $500,000, it’ll be long before your capital can generate any returns.
In the hands of company founders and hired management executives, a company can either grow or crash. As an investor, you don’t want your hard-earned capital being mismanaged by inexperienced entrepreneurs or irresponsible management staff. Vet a prospective company’s lineup of people. Check the company’s website, specifically their “About Us” page, to find the people in charge and then check each individual’s business track record.
A company’s chosen business model has a direct impact on future ROI and growth trajectory. An effective business model can be of great strategic value and generate the profits you and other investors are looking for. There are different types of business models, from franchising, which is popular with restaurant or food-based businesses, to the cash conversion cycle used by Amazon and Apple, among other companies.
As an investor, the goal is to find a balance between risk and reward. Figuring out that fine line in between will take years of analyzing quarterly earnings reports, pulling up price charts, and cultivating a bigger picture view of the sector and market cycle you are investing in.