How to Choose Good Stocks to Invest in?

Invest in a company stock that you want to own forever

As we said earlier, buying a stock expecting that it will grow in value for years, and therefore holding it for a long time is investment; everything else is speculation. When you invest in a company stock, you have to be confident that you are going to own it forever. This is the best way to ensure that you will invest in the best. Now, what kind of companies will qualify as investment worthy and how do you identify them?

If you are currently investing in stocks, what is the method you use to select stocks? Is it low P/E, low Price/Book Value, High Dividend yield?  These methods oversimplify investing, and hence are inadequate. They don’t tell you about the earning capacity of a company - the key driver of its stock price in the long term. They may lead you to take a wrong decision.

The fact is that, in the short run, market sentiments drive stock prices up or down, irrespective of whether the stock is wonderful or not. But in the long run, the price of any stock is driven by the company’s ability to consistently earn profits.  And a company can earn profits consistently only if it has a wonderful business - a business which has done well and will continue to grow in future.

Great businesses have one essential characteristic: they have a Sustainable Moat 

In olden days, a castle used to be protected by a moat - a wide channel dug around a castle and filled with water. The wider the moat, the more difficult it was for enemies to enter and capture the castle. For you, the castle is a company you want to invest in. And the moat is a sustainable competitive edge which protects the company from competition and tough economic conditions! During tough times, companies fight harder to win customers, which usually leads to a fall in prices, and thus, margins. Only a company with a wide, unbreachable moat - a competitive edge - can maintain and grow its profits even during tough economic conditions.

“A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable” – Warren Buffett

What would qualify as a real competitive edge, a moat?

If you had to buy toothpaste, which name comes to your mind? Most of us would think of Colgate, and many of us would buy it. Why? Because this is a name many in India have come to trust over the years. It is quite easy to make toothpaste, maybe even better than Colgate, but without the Colgate brand name, you will sell very little in India. This is the power of the ...........Read More

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