Buy Excellent not Average Companies

How do you know the difference between a quality company and what is junk? Would you rather shop at Sears or Costco? A good place to start is to ask your millenial kids where they spend their money and on what. I would say Costco is doing better than Sears, at least in Canada anyway.

We have many choices of stocks from all the different sectors of the market. How do you know whether to buy Fortis, Emera or Canadian Utilities if you are looking for a utility stock?

How about telecom stocks. How do you differentiate from Bell, Telus, Rogers and Shaw? You can't own them all and you shouldn't. I don't in this space. One or two stocks from at least five sectors is really enough. It's just overthinking in my opinion to own more.

What Makes an Excellent Company?

I don't do or recommend the buying of individual companies in Canada. Although we have many excellent companies providing great products and services this is a personal choice whether or not you should buy one over the other. I don't own but I do love companies like Dollarama, Couché-Tard and Shopify. They either pay a low dividend or no dividend so I don't own them.

I would however own them over shitty companies like Bombardier or Sears. They simply don't make money and or have poor returns year after year. Excellent companies like those mentioned have exhibited the following traits;

• consistently profitable every year
• above the industry average profit margins
• above average growth rate
• double digit returns on invested assets
• loss of capital is always small
• value is always growing

Average to mediocre companies let their value erode over time. Investors get stuck in high yield mode. This is what happens to a lot of REIT investors in Canada. The value of the real estate goes down along with a rising interest rate and before you know it the value of the investment slowly erodes and dividend distributions don't keep up so you end up losing money.

Warren Buffett once said, "I would rather buy good companies at fair prices than buy fair companies at good prices."

Charlie Munger has been known to say you can pay more for quality as in the long run it will end up higher in price.

Think of most of the products or clothes we buy. When you spend more money on quality it just lasts longer. I love Dollarama but if your buying batteries, they're cheap and don't last long so you have to keep buying more. I could go on and on but you get the idea.

My wife tells me all the time, you only get what you pay for. Sure, save money as much as you can shopping for a discount but when picking stocks, search for value and buy the best most excellent company you can find and turn your nose up at the shitty ones.

Where to Look

Check out Morningstar. Look for consecutive years of dividend growth. I like to be able to measure 10 years of data like Tom Connolly suggests. Check Morningstars publicly available data on dividends and earnings. Does the company make money and does it have a steadily increasing dividend record? Where is the current price relative to it's 52 week high? It could be on sale you never know until you look.

You don't need any special skills or a degree in accounting. Practice doing this on your own just like doing your own oil change on your car. It saves you a lot of money in the long run and it's fun getting to know what your invested in.

You always have a choice, choose excellence. How do you value your investments?

Related Post: How to Make the Right Investments

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