One of the great things about previous stock market winners is that we can look back and learn from them. Very often, these high performing companies have several things in common. Here are three that I think are key:
They all have a moat
All of the great companies have competitive advantages, or moats. Think about Apple – because of the ecosystem that its users have, this company makes it highly unattractive for anyone to switch. We can connect our iPhone, our MacBook, and our iPad so that we are always in sync. Apple makes life easier for its customers, which is why it’s been so successful in the past. Now? The iPhone maybe isn’t the greatest phone on the planet, but Apple fans are loyal.
Apple also benefits from its culture of innovation. A few years ago everybody laughed when the company released AirPods. But I guarantee you that if you walk outside your front door you’ll see plenty of people wearing them.
They all have management who are obsessed about the business
Great management cares about a business like they were its founders. They look after it, nurture it, and see it as their own company. These are the people who will lead by example and inspire others.
They also know what’s important. Look at Amazon. The company is famous for having board meetings with an empty chair. And who sits in the empty chair? The customer. At every board meeting, the entire board are reminded about who is most important. The customer. And that’s why Amazon has been a wildly successful business.
“Your margin is my opportunity” says founder Jeff Bezos. He truly believes that cost is Amazon’s problem, and the customer deserves the cheapest prices. By rigorously focusing on what matters – service and cost – Amazon is now one of the largest and most dominant businesses on the planet.
They all generate high ROCE
Return on capital employed (ROCE) is a metric that looks at the company’s own interest rate. Think about it like this – if a company can get back £25 for every £100 it invests in itself, then we’d say it has a 25% ROCE margin.
Just like compounding in our own portfolios, companies that can generate the high returns of compounding can benefit exponentially. If you match this with companies that have low requirements in terms of capital, rather than those that have to spend heavily on maintenance, then you have found companies that can funnel those returns back into growing the business.
Next time you’re looking at an investment, check whether the company has these three attributes. If it doesn’t, then you need to ask yourself whether it is really a company you want to invest in.