In March 2016, I wrote an article on four surprising and important things about investing that I think every investor should know. Over time, the list of things has steadily expanded, with the last count being 28. I recently discovered another fascinating piece of information that I think should be added to the list.
Here’s Number 29:
29. Over long periods of time, there is a tight relationship between a stock’s business performance and its price, even when macro-economic and geopolitical worries abound (And a bonus point: How to find great companies)
The past 53 years from 1965 to 2018 included the Vietnam War, the Black Monday stock market crash (when US stocks fell by more than 22% in a day in October 1987), the “breaking” of the Bank of England (when the UK was forced to allow the pound to have a floating exchange rate in September 1992), the 1997-98 Asian Financial Crisis, the bursting of the Dotcom Bubble in the early 2000s, the Great Financial Crisis of 2007-09, Brexit in 2016, and the US-China trade war that flared up in early 2018.
But in those 53 years, Warren Buffett’s conglomerate, Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B), has seen its book value grow by 18.7% per year while its stock price has increased by 20.5% per year – an 18.7% input has still led to a 20.5% output despite all these things to worry about. There are always issues and problems to fret over, and the future is always uncertain. But that does not mean we shouldn’t invest – there are companies that exist that can compound wealth for shareholders over the long run, as Berkshire Hathaway has masterfully demonstrated.
How can we find such companies though? I’ve been investing for nearly 10 years, and I have a framework for the type of companies I generally look for that has served me well. I look for companies that have:
(1) Revenues that are small in relation to a large and/or growing market, or revenues that are large in a fast-growing market;
(2) Strong balance sheets with minimal or reasonable levels of debt;
(3) Management teams with integrity, capability, and an innovative mindset;
(4) Revenue streams that are recurring in nature, either through contracts or customer-behaviour;
(5) A proven ability to grow;
(6) A high likelihood of generating a strong and growing stream of free cash flow in the future.
Not every company that ticks all the boxes will turn out to be a successful investment. Life does not work this way. Luck has a big role to play in the financial markets too. But, I think my framework could still be a useful tool for you in your search for investment opportunities. Happy hunting!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Berkshire Hathaway. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway.