The basic difference between an investor and a trader is that investors are in it for the long haul. As an investor, therefore, you always need to stay on the lookout for companies that have long-term potential. Here are some tips on how to find them.
Treat financials as guidance rather than rules
Just like with personal tax returns, company financials show the hard facts of how companies have performed in the past. There are, however, two issues you always need to remember. Firstly, past performance is not always a clear guide to future prospects. Secondly, figures alone only tell part of the story.
This is particularly true when it comes to companies. Management and leadership changes can make a huge difference to a company’s performance. Sometimes this is just short-term disruption. At other times, it can mean a significant change of direction, for better or for worse.
Look for the ability to innovate
While the COVID19 pandemic was hard on everyone, it may have a silver lining. Investors now have an unprecedented opportunity to see how well companies adapt to challenging situations. Obviously, these assessments have to look at each company in the context of its own individual situation.
It’s not just clearly unfair to compare a cafe to an insurance company. It’s unfair to compare a cafe in one part of the country with a cafe in another. It is, however, perfectly fair to look at what steps a company’s management took to address the situation it was in. It’s also fair to look at how a company stands in comparison to its direct competitors.
You’d probably expect more high-tech, often younger, companies to adapt well and for the most part, you’d be right. Interestingly, this doesn’t seem to depend on their industry sector, more on their use of technology. For example, the PHP Agency is in the life insurance sector. That’s about as traditional a sector as you can get and yet it thrived during the pandemic.
Evaluate their ability to attract and keep market share
One of the coldest, hardest truths of business is that most businesses are tapping into the same pool of consumers. This doesn’t have to be a problem as long as there is a reasonable balance between supply and demand. It can, however, lead to major disruption if new entrants start piling in and disrupting the existing balance.
The overall impact of this may actually end up being positive. Sometimes the arrival of new entrants increases interest in the sector. In other words, the pie gets bigger so everyone can still get a decent slice. Sometimes, new entrants force existing companies to up their game or move on. This is often beneficial in the long-term but can be very painful in the short term.
Because of this, there are three types of companies that have a particular value to investors. The first is companies that can effectively create their own market. This is at least as hard as it sounds. It essentially requires companies to develop a truly groundbreaking product or service.
The second is companies that can access underserved markets and the third is companies that can generate great customer loyalty. There is often a connection here as companies that are first to (a) market have the first chance to build customer relationships.
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