What to buy: Quality of Product

In this day and age, it is almost impossible to escape your eyes from seeing stock ticker symbols and quotes since they are everywhere on the Internet, TV, blackberry, etc. As far as I am concerned, however, it is not the price to which you should pay attention first when it comes to looking for what to buy. It is what they sell. The stock price is important at the end of your valuation to be compared with the intrinsic value that you estimate, not the beginning of your valuation, unless it is a clear arbitrage opportunity.

Many people often forget that a piece of stock represents a piece of ownership to the company. In the short term, the arbitrage opportunities can be profitable if implemented with caution, although it is just a one-time profit. In order to make a successful investment decision in the long term that will give you repetitive compounding profits, it is crucial for you to look at and understand what they sell first.

There are countless companies selling various products and services, but there are relatively a few firms selling quality products.
What I mean by the quality products is as follows:

1. Maintainable Monopoly Power
Monopoly is bad for the society, but excellent for the company. A firm to be a long term winner should have some sort of monopoly that is maintainable against competitors and that doesn’t violate the law. It may come from geography, brand name, know-how, technology, low-cost operation, etc.

2. Repeat Customers
A product needed only once in a lifetime is excellent for customers, but bad for the company. The product should have the intrinsic quality that makes the customers buy over and over in the future.

3. Benefits customers, suppliers, and employees
To sum up, everyone should be happy. If customers are not happy, but the firm is profitable because of the monopoly power, the firm becomes soon susceptible to political pressure and regulations. People know that the consequences of frequent and prolonged strikes are obviously detrimental to the firm.
What people may not recognize is that the firm’s degree of profitability that resulted from happy customers and good personnel relations is far greater than the direct cost of regulations and strikes. Although it is hard to quantify the firm’s success in this area, you can ask your friends and families (i.e. customers), and you can also get a feel by visiting stores. In terms of the quality of labor policies, you can look at labor turnover in one company as against another in the same industry, and the size of the waiting list of job applicants.

No comments:

Post a Comment