Yahoo Finance The two golden rules for stock-picking
You’ve figured out your risk level, done the research, picked your investing strategy and watched the market.
But even the most seasoned investors can fail to consider these two factors when choosing stocks.
What are they?
Corporate culture, and something called a ‘moat trajectory’, according to investment manager WCM Investment Management.
Here’s a breakdown of what these two things are and why they’re so important.
Corporate culture
An organisation could have the greatest products, a robust brand and reputation, effective policies and processes and a long history of trading, but if the culture is poor it’s much less likely to succeed, WCM portfolio manager Kurt Winrich explained.
Poor corporate culture can have a subtle impact, but has the potential to create an environment rife with poor service, slow delivery and even rude employees.
Ultimately the customer experience can be negatively affected, which would go on to bruise the company’s long-term financial performance.
“In contrast, companies with great service and employees that go the extra mile rarely have complaints made against them. And if they’re not making complaints, customers will return to the better businesses, leading of course to better business results. It’s that simple,” Winrich said.
So how does this relate to stock-picking?
“If your employees hate working at your organisation, they are not going to give their best efforts or ideas, and that will make it nearly impossible to have a good company (or investment),” Winrich pointed out.
A healthy corporate culture leads to a healthy business, and therefore a healthy stock investment.
So how do I access information on a stock’s corporate culture?
Unfortunately, it’s easier said than done.
It involves face-to-face meetings with management and employees, looking at turnover rates, online reviews, industry surveys, net promoter scores, and overall customer satisfaction.
Moat trajectory
Originally a concept from investment veteran Warren Buffett, a ‘moat’ is the company’s competitive edge has that prevents its competitors from merely imitating and therefore destroying its business.
A company with a ‘wide moat’ is better-protected from competitors and can safely earn higher profits for a longer period.
But Winrich points out that the ‘direction’ of a company’s economic moat is more important than its size.
So what do I need to do?
Consider if the company has a long-term growth path, or if it belongs to a sector set for secular growth, meaning it isn’t dependent on seasons or cycles.
Is global demand for the company’s product shrinking or growing?
“The critical idea is how the competitive advantage is changing – is it getting stronger, or is it getting weaker? It’s the direction of change that matters, not the absolute level,” he explained.
Some investors, believing larger companies are safer bets, might invest too much in what they consider to be market-leading firms.
But this is a mistake.
If a company doesn’t keep its competitive edge, they might run into challenges and see its share price suffer as a result.
And the ultimate golden rule?
Savvy investors who want to win big should look for companies that have both factors.
“The magic combination is a culture which encourages the behaviours that enhance the company’s competitive advantage,” Winrich said.
“Accordingly, good investment research today is not just about getting hard financial numbers; it’s also about gaining a better understanding of the ‘softer’ aspects of businesses.”
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