“To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
– Sir John Templeton
The Singapore stock market bellwether, the Straits Times Index (SGX: ^STI), was on a tear in 2017, rising close to 18% to end the year at 3,403. Those who feel they had missed out on buying great companies during that year have got a second chance now.
Since the start of 2018, the index has declined by some 11% to 3,045 at the time of writing. Things could continue going south in 2019, and that’s where your opportunity to pick up some bargains come in again. But you can’t just go out and buy any company – you need to choose companies that are destined to last.
In this article, let’s look at how to pick great companies to hold for the long-term in three main points.
Criteria #1: Enjoy durable competitive advantage
Billionaire investor, Warren Buffett, once mentioned:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Companies with durable competitive advantage or wide economic moats are able to earn outsized profits and possibly take market share from competitors. In Singapore, there are some listed companies with durable competitive advantages, and examples of them can be found here.
To learn about the different types of economic moats that companies can have, you can check out the article written by Royston Yang here.
Criteria #2: Possess strong financials
Companies should also have a strong track record of growth. Broadly, their revenue, net profit, net profit margin, and free cash flow should be increasing consistently on a yearly basis. A business that can grow its earnings in a predictable fashion usually has pricing power.
On the other hand, commodity-like companies compete based on price alone and would not be able to produce consistency in their earnings.
The company should also possess a strong balance sheet with more cash than debt. On the contrary, companies with highly leveraged balance sheets and an inability to produce any free cash flow for an extended period are very likely to run into serious trouble. In the business world, the phrase, “Cash is king,” exists for a reason.
Criteria #3: Have valuations that are not exorbitant
Last but not the least, the company must have a share price that is lower than its intrinsic value, or at the very least, be fairly valued. If we pay too high a price for the stock, the chances of our investment succeeding will be low.
To learn how to value companies using the price-to-earnings, price-to-book and price-to-sales valuation methods, you can check out Jeremy Chia’s article here.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn't own shares in any companies mentioned.