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Stock Opportunities in Rough Times

http://davidkretzmann.com/blog/?p=333

Today many people are discouraged with the business world and stock market as an investment possibility. This is understandable with the pain being felt right now, but people might be jumping the ship at a time when many opportunities abound. People are quick to diss stocks when the going gets rough, but they forget that there is a business behind every stock, and it is the business, not the stock, that makes an investment a success or failure in the long run.

I am a long-term investor and encourage people to consider the idea of finding quality, well run, financially stable businesses with great products, with the expectation of hanging on for many years. This philosophy made the most sense when I got interested in stocks five years ago, and it has been the foundation of my stock investing since I started investing in 2005. I find the strategy of focusing on the long-term strength and potential of a business much more appealing and realistic than focusing on the short-term volatility and movements of a stock.

Coca-Cola is a great example of a quality business remaining a fine long-term investment even in the harshest of conditions, during the Great Depression. Coca-Cola stock hit its then-high of $191.38 in June, 1930. After the stock market crash and downturn lasting a couple years, the stock hit a low of $68.50 in December, 1932. One might expect that in the Great Depression the stock would falter, lose steam, and probably not perform that spectacularly. Just three years later in November, 1935, the stock reached a new high of $298.50, a quadruple from its low just three years earlier. Considering the times, this is nothing to smirk at. Some stocks absolutely did provide financial stability in difficult times.

You might notice that the vast majority of the greatest investments over the past century have been businesses with household products, not even necessity products. Cigarettes, soft drinks, household items, and other simple products are what have brought success to long-term investors over the past century, good times and bad.

Investing great Peter Lynch has often mentioned that if you invest in twenty businesses, you only need one or two superb winners to make investing worthwhile. Lynch also preaches an “invest in what you know” style. The companies that survived, and even expanded, through the Depression were companies with products that nearly anyone could understand on their own, without the help of a financial analyst. These are the types of businesses you want to look for and the types of businesses that have turned into great long-term investments.

Look at some of the businesses weathering the storm today. Chipotle Mexican Grill is opening roughly 130 locations a year (and today operates more than 800 locations in the U.S. and Canada), increasing cash flow production and profit margins, growing the cash on its balance sheet, and doesn’t carry a dime of debt. Hansen Natural (creator and owner of the wildly popular Monster Energy brand) is expanding into new countries, launching new products, and every quarter gains market share and gets one step closer to overcoming top energy drink competitor Red Bull. Google, Netflix, and Apple (three of the most common names today) have all doubled since 2005.

You don’t have to find obscure companies to do well in the stock market; stock history proves this is not the case. It makes no sense to invest your money in a business that you don’t fully understand, because if a situation like we have today comes along, you have no idea how that business will function or how to tell what position it is in. However, if you invest in a business whose product(s) you know and love, you will have a much easier time deducing the strength of the company.

Investing in stocks does not have to be complicated. I have several things that I look for. A business that I already love or understand is key. When there are smart and experienced people running the business, I feel a lot more comfortable with an investment. I much prefer businesses that who have a strong position of cash, and little or no debt. As we saw with the examples of the Great Depression, the companies who spent and advertised during the rough times often came out ahead of the competition. A strong balance sheet provides a cushion for hard times and gives any business a tremendous advantage over competition. In a nutshell, I often look for three things to narrow down the list of companies I’m interested in: products I know and love, smart and experienced management, and a financially secure and growing business.

A rough economy is not the time to run from stocks. It is precisely these times that great businesses are put in the sale bin at the front of the store. The short-term movements of a stock do not define the long-term success or failure of a business. Focus on the fundamentals, management, and other important factors of a business to judge a stock. In the long run, those factors count the most for the success of a business and investment.

I am not predicting an easy ride from now on with stocks. I’m watching with interest many companies who I may potentially invest in, but I’m certainly not rushing in. Patience is essential to an investor focused on the long-term, always be sure you are 100% comfortable with the business before you make an investment. Today is the time to look for quality businesses hit down with the stock market, whose long-term fundamentals and strength remain intact. In the world of stocks, never let short-term troubles blur long-term potential.

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