My investing style: Buy and hold high-quality businesses.
Here are 15 traits that tell me I’ve found a great business
1/ Recurring Revenue Types:
Business Services $MCO
Real Estate $STOR
2/ Recession-Proof Demand
Great companies sell products/services that are in-demand in good times and bad
That allows them to grow regardless of what is happening in the broader economy
3/ Organic Growth
“Organic” growth: Growing by increasing sales of internally developed products/services
“Inorganic” growth: Growing from mergers & acquisitions
Organic Growth > Inorganic Growth
4/ High & Expanding Gross Margin
Indicates that the company’s products/services create a huge amount of value for the customer Rising gross margin also indicates pricing power
5/ Widening moat
Capitalism is brutal
A widening moat will protect a company’s profits from competition
Sources: Network effects: $FB
Switching costs: $ADBE
Durable Cost Advantage: $WMT
Premium Brand: $PTON
6/ Operating Leverage
If a company can grow its costs at a slower rate than revenue then its profits will grow at a FASTER than revenue.
7/ Low-cost customer acquisition
The best marketing is no marketing Great companies create demand through word of mouth and spend little on sales & marketing
8/ Diversified Revenue
Companies that depend on a few customers for most of their revenue are fragile One customer leaving can ruin the investing thesis Great businesses serve thousands of customers, not just a few big ones
9/ Great Management
Management matters Here is a thread I wrote in what I look for in a great CEO
Track Record Of Outperformance Winners keep on winning
Has the business outperformed under this CEO?
Market share growing?
New products/services selling?
Invest in CEOs with a proven track record of success
10/ Reinvestment Opportunities
Great businesses can reinvest profits back into themselves at high rates of return for long periods of time This continuously grows the profit stream, which will eventually lead to share price appreciation
Companies that produce profits have far more control over their destiny than companies that don’t I want to see that both net income & free cash flow are positive & growing
Great companies create new revenue opportunities for themselves by launching new products/services that open up new markets
$AMZN -> AWS
$MELI -> Payments
$TSLA -> Energy Storage
13/ Huge Total Addressable Market (TAM)
I want to own companies that have only captured a small fraction of their opportunity That creates a long runway for continued growth
14/ Price Maker
Companies that sell commodities have no control over the price of their product I want to own price makers, not price takers
15/ Anti-Fragile Balance Sheet
Cash-rich companies get stronger in downturns Debt-laden companies get weaker in downturns
If you enjoyed this then maybe I can tempt you with my Twitter page /_JosephWilks where I write daily insights on long-term investing like this.