Finding the best stocks to buy now is not an easy task. After all, the stock market is filled with thousands of companies, many of which aren’t anything special. Regardless of which market I’m looking to invest in, the rule to finding my next best investment stays the same – buy and hold fantastic businesses. So what constitutes as a fantastic business in my mind?
Identifying the best stocks to buy now
Despite what many investing “experts” selling guides on the internet will tell you, there’s no magic formula to beating the market.
Stock analysis requires time, diligence and discipline. But there are traits that I’ve seen repeatedly with all of the biggest companies today. How did Apple or Amazon get to trillion-dollar valuations? The answer is simple — they both have an economic moat.
A moat is a collection of competitive advantages that grant a company the upper hand. From my experience, there are three types:
Pricing Power: The ability to charge more for products and services even when a cheaper alternative exists.
Capital Efficiency: The ability to offer similar products or services to a competitor but at a lower operational cost, leading to higher profits.
Network Effects: The ability to add additional customers or capacity at negligible marginal costs while simultaneously increasing the value of its products or services.
Apple has plenty of pricing power thanks to the continuous innovation and quality of its products that helped build its reputation as one of the best tech brands. This inspired cult-like loyalty from its customers, some of whom are willing to camp outside an Apple store to get their hands on a new iPhone when it goes on sale the next day. That’s why it’s been one of my best stocks to buy for years.
Knowing the risks
Regardless of how impressive a business can be, there’s always risk for investors. But that risk varies depending on the company.
In my experience, drug development can be one of the most problematic sectors for a small business to succeed in. The development cycle can last longer than 10 years, with an average cost of $1.3bn. And even if regulatory approval is obtained (and that’s a big ‘if’ as around 90% of drugs fail to get past Phase I trials), it may no longer be economically viable. By contrast, Oil companies have a completely different set of threats to deal with. Many operate in politically unstable parts of the world.
The list of risks for each company and industry is simply too long to explore. But when looking for the best stocks to buy now, being aware of the dangers and their potential impact on the business has saved my portfolio from ruin more times than I can count.
Learning from mistakes
One thing I’ve learned over the past decade is that stock picking is a craft. It requires time and practice to get right. Everyone, even Warren Buffett, makes mistakes. In 2019, the Oracle of Omaha publicly admitted to overpaying for Kraft Heinz.
Making mistakes is part of the learning process. And it’s almost guaranteed when searching for the best stocks to buy now. But, as long as I find out what went wrong or which piece of information I missed, then the next time, I’ll be more prepared.
The post How to find the best stocks to buy now appeared first on The Motley Fool UK.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and Apple. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021