Searching the web or asking for quick tips for the best stocks to buy may not be your best investment strategy… The reason is because, when you follow other’s recommendations blindly, you will be stuck later on when you are deciding whether to sell, cut loss or continue holding the stock!
Here’s a simple framework for you to pick the best stocks to buy, ones that generate sustainable growth for your portfolio, multiplying itself over and over:
1. Business Model
While property is all about location, location and location, the stock market equivalent always falls back to business model, business model and business model
Avoid buying hot stocks
just because they are hot… Back in the days, GPRO (GoPro) was an extremely hot product and investors were pouring their money into the company, however, the stock (as of April 18) has not been performing as well as expected!
What’s important in a business model is looking out for durable competitive advantages.. this means characteristics of the business that allow it to crush its competitors without bowing down! For example, Apple has a keen durable competitive advantage in building a ton of intellectual property that has allowed itself to build an entire ecosystem of customers that use its products!
2. Pricing Power
With competitive advantages, great businesses can charge whatever price they want for their products! The best stocks to buy belong to companies that set the price in the market, not those that follow. Once a business has to adjust down its price to gain back customers, most of the time, this is bad news!
3. Scalable Products
Not all products sold by businesses are made equal! If you want a fast grower, look for a business that is rapidly scalable. Examples would be technology companies, products rather than services. The best stocks to buy are the ones that can rapidly multiply themselves in value for you!
4. Free Cash Flow Generating
Cash flow is an important part of any business. A business can be profitable on the books, but have zero cash flow
! Cash flow refers to real money coming into the company’s bank. For example, a company can be profitable and have no cash flow because the money may be tied up with customers owing the company. That is a dangerous game to play because the business lacks a safety net and lacks the resources to expand itself with no cash flow. Cash flow is often required to fast expansion.
5. High Return on Equity
Good businesses often report high Return on Equity, generating powerful returns for its share holders. This is a mark of business efficiency.
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