The simplest and safest way for an individual to consistently make money in the stock market is to buy the very best and the largest businesses.
What makes a great business??
1.) You want to own the number one company in that particular industry, the company that has a virtual monopoly on that market, a proven track record that dominates it’s industry. Take McDonalds for example, McDonalds is the premier fast food restaurant in the WORLD. This company has increased its market share and profitability year after year. The chances of McDonald’s going out of business are slim to none.
2.) A company that produces positive cash flow year after year. Most people won’t find these businesses as sexy because the chances of their share prices doubling, tripling, or quadrupling in a short amount of time are very slim.
3.) Good businesses return cash to their shareholders year after year, but the best businesses also increase those cash returns year after year. Mcdonalds has raised their dividend every year since 1976, that’s going on 40 years almost.
4.) Great businesses buy back their own shares. If you truly believed in your own brand, why wouldn’t you purchase your own shares? When businesses buyback their shares, it creates more value for the share holder.
When you identify companies that fit this criteria, it’s important that you buy them at a value (discount) to their true worth. Even the best businesses can be expensive. Buying at a discount ensures that you have a comfortable cushion and should not be concerned with market fluctuations.
Below is a chart of how McDonald’s performed during 2nd worst stock market crash in American history.
If you look closely, if you had purchased shares of McDonalds at it’s height in August of 2008 (about $58.50) the low point of the crash was around $46, that’s a 21% loss of equity in your position, during the 2ND WORST STOCK MARKET CRASH EVER! Not bad.
Now if you were only concerned with McDonalds as a business, during this market crash you would have held on to your shares and weathered the storm. As of today take a look at how McDonald’s shares are doing.
Let’s take a look at an industry competitor that is an average company in comparison to dominant behemoth McDonalds.
Wendy’s & Arby’s went from $9 to under $3, that’s over 66% of it’s market value during the 2008 crash!
If you own large, dominant, and profitable businesses you can go about your day worry free and sleep well at night.