You know the saying “the cream always rises to the top?” It is often true regarding the stock market. A name like McDonald’s or Caterpillar might not be sexy compared to a hot biotech stock, but quality stocks are the ones that perform best over the long term. The trick is figuring out which stocks deserve your investment.
Quality stocks always rise to the top
Do you remember when Facebook went public in 2012? The company’s prospects were fuzzy, but everyone seemed to believe that founder and CEO Mark Zuckerberg was creating something magical. Nevertheless, the stock was a flop. I remember a Barron’s headline predicting the stock would fall to $15 per share or lower, more than 60% below the IPO price.
Many patient investors understood Facebook’s potential and took a risk. After all, one billion plus users couldn’t be wrong. (Today, Facebook has more than 2 billion users, or 28% of the entire world population!) Those who waited for the company to execute on their strategy were handsomely rewarded. Quality wins out.
How do you find them?
Why is a name like Facebook such a rarity? In my experience, management often does not share the same vision as a long term investor.
Usually we hear a slick sales pitch about how this company is going to change the world with their new (or revolutionary) product. Management will talk up their company to improve the stock price – so they can unload shares. Then there are companies that may not be profitable yet, or they might not be growing as fast as they had hoped.
If companies are generating buzz, find out why. What is the long-term strategy? Does the company have strong fundamentals? This is very much the case with Tesla. As long as you understand and manage your risk, you are in a position to potentially bank some large gains.
And don’t forget about the boring “old” stocks. Companies that have been around for decades – or longer – might not be sexy, but they are quality stocks. They deserve a place in your long term portfolio. If they are not performing well right now, take the risk and buy some shares. They will likely carry your portfolio to greater heights.