Finding the Right Stocks to Invest in


When I wrote and published the SmallIvy Book of Investing: Book1: Investing to Grow Wealthy, I covered a lot of the information on how to invest, including what the different types of assets are (stocks, bonds, mutual funds, warrants, LEAPs, REITs, and options) and what the risks are when you purchase these assets.  It also covers how to use investing, along with management of your money from work, to grow wealthy and have a good chance of becoming financially independent by the time you are in your mid to late forties, assuming that you start right out of college (or even in high school).


 

A question I would often get, however, is:

How do I find stocks to invest in?

To answer that question, let’s take a look at the type of company that you want to invest in, assuming you’re following the advice in  the SmallIvy Book of Investing: Book1: Investing to Grow Wealthy and buying great companies and planning to hold them for a long time.  If you’re instead planning to trade stocks – trying to time the market or find stocks to hold for a short period of time – I wish you the best of luck, because I think you’ll need it.  After several years of trying to do the same thing, I learned that I would have gotten a better return just investing in index mutual funds.  (See, for example, Bogle On Mutual Funds: New Perspectives For The Intelligent Investor (Wiley Investment Classics) to learn about this very sound investing method).  The way to have a chance to outperform the markets with individual stocks is to find great, growing companies and then plan on holding them of a long time, through good times and bad.

If the Loveless Cafe, near Nashville, TN were a publicly traded company, that would be the kind of stock you would want to own.  They have a top-quality product (fantastic southern food in a unique atmosphere) with few real competitors in the area.  They are fortunate in that a lot of people think they can cook and open southern-style restaurants, but most of them can’t cook.  Those who become chefs end up cooking fancier fare and also tend to open places in the bigger cities rather than out in the country, and therefore don’t compete. For more information on The Loveless Cafe, check out Meet Me at the Loveless or one of the other books below (just click on the image).

Part of the charm of the place is the location – it is just on the side of the road in what used to be a motel.  It is close enough to Nashville that people visiting the Music City can head out there for dinner after a day shopping and seeing the sites in Nashville, but it is remote enough to be memorable.  The remoteness also helps in that if you want a snack or a drink while you’re there, you almost need to pay the high prices they charge in the stores surrounding the restaurant since they have an effective monopoly.  (In actuality, there is a gas station with a store right next door, but they keep it hidden from sight on the property with hedges and such – smart.)  Having a lot of available free parking, to me at least, also is a draw.

More than just being a country diner, The Loveless Cafe is a name and a destination.  They can sell shirts, bags, and hoodies with their logo plastered across the front and people will pay high prices to buy them.  Think about that – owning a business where people from all over the world will pay you to advertise for you!  Few other restaurants have been able to accomplish this feat  Some examples include The Hard Rock Cafes, Planet Hollywood, and Joe’s Crab Shack.  There are other restaurants that are successful, but no one is going to pay to wear their logo.  In fact, most people probably wouldn’t wear something with their logo even if it were given to them.  Would you wear a shirt advertising Red Lobster, The Olive Garden, or Outback Steakhouse?  These are all great restaurants, but they are not destinations and tourist attractions in their own right.

As it stands today, The Loveless Cafe would not be a good investment as a SmallIvy, grow wealthy over time through growth, stock.  It would be a great income investment since I’m sure that the restaurant generates a ton of cash each year.  Even though their prices are very reasonable in the restaurant (not so much in the gift shops surrounding the restaurant), they pack people in every night from opening to closing.  The issue is that they currently don’t seem to have a plan to grow – they are happy just doing what they are doing in one location.  A great growth stock requires that the profit the make each year increases – not just that they do a lot of business.

The amount of income you produce is proportional to the number of people who you serve.  If the Loveless Cafe were to be sold to a family or a corporation who desired to expand operations, opening additional locations and also expanding the lines of products they sell directly to consumers off-of-the-web, they would then be instantly transformed into a great growth company.  So that is what you need to look for when selecting a company:

  1.  Find a great brand with few real competitions, at least in the same class of the company.
  2. Make sure the company has the ability to expand.
  3. Make sure that the company has good management. (Just look at their track record.  If they have had the ability to steadily grow the business each year while taking on a reasonable amount of debt, if any, they are good managers.)

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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