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3
What to Buy
The Fifteen Points to Look for in a Common Stock
W
hat are these matters about which the investor should learn if he
is to obtain the type of investment which in a few years might
show him a gain of several hundred per cent, or over a longer
period of time might show a correspondingly greater increase? In other
words, what attributes should a company have to give it the greatest
likelihood of attaining this kind of results for its shareholders?
There are fifteen points with which I believe the investor should con-
cern himself. A company could well be an investment bonanza if it failed
fully to qualify on a very few of them. I do not think it could come up to
my definition of a worthwhile investment if it failed to qualify on many.
Some of these points are matters of company policy; others deal with how
efficiently this policy is carried out. Some of these points concern matters
which should largely be determined from information obtained from
sources outside the company being studied, while others are best solved by
direct inquiry from company personnel. These fifteen points are:
1. Does the company have products or services
with sufficient market potential to make possible a
sizable increase in sales for at least several years?
It is by no means impossible to make a fair one-time profit from com-
panies with a stationary or even a declining sales curve. Operating
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economies resulting from better control of costs can at times create
enough improvement in net income to produce an increase in the mar-
ket price of a company’s shares. This sort of one-time profit is eagerly
sought by many speculators and bargain hunters. It does not offer the
degree of opportunity, however, that should interest those desiring to
make the greatest possible gains from their investment funds.
Neither does another type of situation which sometimes offers a
considerably larger degree of profit. Such a situation occurs when a
changed condition opens up a large increase in sales for a period of a very
few years, after which sales stop growing. A large-scale example of this
is what happened to the many radio set manufacturers with the com-
mercial development of television. A huge increase in sales occurred
for several years. Now that nearly 90 per cent of United States homes
that are wired for electricity have television sets, the sales curve is
again static. In the case of a great many companies in the industry, a
large profit was made by those who bought early enough. Then as the
sales curve leveled out, so did the attractiveness of many of these
stocks.
Not even the most outstanding growth companies need necessar-
ily be expected to show sales for every single year larger than those of
the year before. In another chapter I will attempt to show why the
normal intricacies of commercial research and the problems of mar-
keting new products tend to cause such sales increases to come in an
irregular series of uneven spurts rather than in a smooth year-by-year
progression. The vagaries of the business cycle will also have a major
influence on year-to-year comparisons. Therefore growth should not
be judged on an annual basis but, say, by taking units of several years
each. Certain companies give promise of greater than normal growth
not only for the next several-year period, but also for a considerable
time beyond that.
Those companies which decade by decade have consistently shown
spectacular growth might be divided into two groups. For lack of bet-
ter terms I will call one group those that happen to be both “fortunate
and able” and the other group those that are “fortunate because they are
able.” A high order of management ability is a must for both groups. No
company grows for a long period of years just because it is lucky. It must
have and continue to keep a high order of business skill, otherwise it will
not be able to capitalize on its good fortune and to defend its compet-
itive position from the inroads of others.
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