24 July 2018
Fool's Rules for Investing Success
Find Strong Management Teams -- Know well the managers of the companies in which you invest. The most effective way to find multi-bagger stocks is to look for a leadership group that looks committed to long-term operational success and creating superior returns for shareholders. Beware of management teams that give out too many stock options, or appear to be having more fun on the golf course than in the office.
Look for Great Business Models -- Superior stocks often have natural moats built around them to protect them from competition. David Gardner looks for companies that set their own rules—often by creating or revolutionizing an industry. Tom chooses more established but little-known companies that have found unique ways to dominate their industries.
Show Us the Cash -- There's no better indicator of business health than cash flow. Many companies now make an art form of disguising their true cash flow. So review the cash flow statement carefully. Look out for companies with overloaded finished-goods inventories or declining profit margins.
Stay focused on the long term -- Stock investors need a time horizon of at least three to five years. Ups and downs in stock prices can be unrelated to the true strength of the business. Every great stock has suffered short-term misery. Even Warren Buffett's Berkshire Hathaway lost almost 50% of its value from March 1999 to March 2000. Staying invested for the long term greatly reduces the risk of selling at the bottom and allows your wealth to compound over time.
Generate future fair valuation ranges before buying -- There are lots of great companies run by great management teams, but their stocks are overpriced. Great returns come from buying great companies at good prices.
Look for Growth Opportunities -- Target companies whose stocks you think could grow 20% or more annually for five years. One or two fast-growing companies can substantially lift your entire portfolio.
Diversify -- Make sure that no single failure will keep you up at night. Balance your portfolio into a range of stocks. Vary your investments by industries, location, and size of company. Use an index fund to achieve more diversification.
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