As the market marches higher, I must keep reminding myself that it is not the bull market that is making me money but the good investment decisions I made a few years back. The decision you make today about what to buy or sell will drive your results two to five years out. Lately, we have been doing some selling and getting ready for the next big opportunity.
In addition to increasing the level of cash in our portfolio, we are getting ready by going back to basics and revisiting some of the investment principles that have made us big money. They include:
- Understand what makes a company great. Always be on the lookout for the exceptional companies. Learn about them at all times. New players come on the scene frequently: develop the process to identify them. Get ready for the day they go on sale.
- Are the customers going bananas over the experience? This is the WOW factor. Learn how to recognize it. McDonalds, Amazon.com, Apple, Lululemon, Crocs, and many others are WOW companies.
- Great companies generate high return on capital.
- Remember the destructive value of debt. Leverage kills. Great businesses don’t need much debt. Stay away from too much debt.
- Develop a feeling for how big the economic ramp facing the company is: $CROX (2008), $NFLX (2004), $AMZN (2001), $PCLN (2001), $MCD (1965).
- Learn simple valuation techniques. Keep it simple.
- Bear markets create extreme undervaluation. Some stocks will trade at lower than $.10 on the dollar in an environment under stress.
- Recognize the results of buying a great company under extreme undervaluation during a bear market: the price you pay might be equal or lower to the company’s earning power five years out. Eventually, you could receive the price you paid in the form of an annual dividend.
- Be patient.
Anything else I should add to this list?
Written by Michael Bigger, author of How Traders Achieve Creative Flow.
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