How to Find a Good Company

HOSTS Alec Renehan & Bryce Leske|6 January, 2020

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

We’ve taken the plunge and put money into the stock market through an index fund. Now it is time to take the next step and buy our first company. There are thousands of companies on offer just in Australia, with hundreds of thousands of companies available across the globe (latest estimates 630,000). With so much choice, no one can research every company.

So we introduce three simple ways to cut down that number of companies to a far more manageable list. This is the daunting part for a lot of people. Starting the research process on individual companies and trying to assess which will be good investments.

This episode should make a little easier but most importantly, should remind you that you don’t need to get it right every time. No one has a 100% track record in investing. The good thing – to build long term wealth you don’t even need to get 50% right. By selling companies you are losing money on, and letting your good picks grow and grow – you can still make money while being wrong half the time.

In this episode we start to unpack how. In this episode you will learn:

  • The vast number of companies available for you to invest in
  • Three ways you can narrow down your choices
  • Look around and use your experiences
  • Follow the leader
  • Stock screeners
  • Key things to keep in mind when buying individual companies

Want more? Subscribe to Equity Mates Investing Podcast, social media channels, Thought Starters mailing list and more here

Bryce: [00:00:31] Welcome to get started, investing a series of lessons to help you on your investing journey. This series is for anyone that wants to get started investing, but really is not sure where to start. Our aim is to make the markets as accessible as possible for you. My name is Bryce and as always, I'm joined by my equity buddy Ren. How's it going, bro? I'm very good, Bryce. [00:00:51][20.0]

Alec: [00:00:51] We are ripping through these episodes and hopefully we are building Iran's knowledge as we go. We have made our first investment early. Yes. Researching. Yes. And now we've got a broker. We do a broker. And now we are at the point where we're looking at individual stocks. [00:01:11][19.5]

Bryce: [00:01:11] Yes. So we've discussed accessing the market via indexes. Yes. As maybe the first way that you can get started in investing using ETF says the tool to do that, choosing some larger macro themes, investing in particular countries. And as you said, Ren now, you know, answer that age old question is how to actually find a good company. Yeah. We want to talk now about looking at getting access and getting you started on buying direct stocks. [00:01:37][26.4]

Alec: [00:01:38] Yeah. And I mean, in the last episode we spoke about your transport example and top down and bottom up research. But I guess what was missing in that discussion is what are we actually looking for? Yeah. Well, what is a good company going to try and broadly answer that question? Yes, it's a it's a big question, but there are some there are some things that are really common amongst any company that does well. And we'll unpack some of them in this episode. [00:02:04][25.6]

Bryce: [00:02:04] So we did an episode on information Ren and as you said, doing that sort of top down approach. But we didn't touch on some ways that some really simple ways that you can, I guess, get inspiration for finding specific stocks. Now, we discussed, obviously looking in newspapers and that sort of thing. But I think one of the best ways, as a beginner investor to start the research process in individual stocks is to use the environment in which you're in. Now, it sounds a bit sort of airy fairy, a bit fluffy, but you will be surprised the amount of companies that are around you, like in this room right now. We've got Sony, we've got Apple, we've got, you know, Nike. There are a number of companies here that are listed on stock exchanges around the world that you can invest in as a beginner investor and use what's around you literally to start that investing process. [00:02:54][49.6]

Alec: [00:02:55] Yeah. And if you think about how stocks make money or stocks appreciate and how companies make money, the market gets information that a company is doing better. They're selling more whatever. They're offering more services. And then the share price changes on the back of that, because there's new information and there's new expectations for the company, because where the consumers of a lot of these companies and ask our families, our friends, if we have a good sense of something that's becoming really popular amongst our friendship group, that's information that the market might find out. You know, when the company next releases its sales. [00:03:29][34.6]

[00:03:30] But if you have a good sense that something's coming, great opportunity to get ahead of the market and catch a trend before, you know, the broader investing community finds out about it. [00:03:39][9.3]

Bryce: [00:03:40] Yeah. To your point, Ren that sort of qualitative research, you know, you might think that all these big investment banks and fund managers all sit in their office with all these, you know, large amounts of data that we don't get access to. But surprisingly, even Joyella that we speak to on equity makes investing podcast. She says one of the tools that she uses to determine, I guess, the forward success of a company is looking in their catalogues and seeing how often their products are on special. If, for example, Blackmore's is constantly on special at Kemmis Warehouse, she sees that as a sign of, well, maybe it's not a good sign of things to come. So that's just a classic example of using your surroundings to start making, I guess, informed decisions and judgements on perhaps what the outcome or the forward, I guess, success of a company may be. [00:04:23][43.4]

Alec: [00:04:23] So if we put it in really practical terms, we've got Julia Lee's catalogue example, which I reckon is a good one. What are some other things that you might do in your day to day life to try to get an understanding of what's what's going? [00:04:35][11.7]

Bryce: [00:04:35] Well, so fortunate enough, I guess, to be working in retail. So I used the baby formula example as one in which it was very obvious that Bellamy's and an A2 milk and, you know, those sort of companies were riding the success or the demand of infant formula, particularly from the Chinese community. And when I was sort of in stores, I could see that these shelves were always empty. I mean, that's a pretty good indication that their sales for those companies at that period of time are going to be pretty strong. So using that, you can then go and start to have a look at Bellamy's and A2 milk and use that as, I guess, their entry into discovery for those sort of stocks. What about yourself? [00:05:16][40.5]

Alec: [00:05:17] So I think that's a good one. Retail is a we're in a lucky position because we say so much move through our shop. But I think you can even take it back a step. And literally just without being creepy about it, just people watch. [00:05:29][12.4]

Alec: [00:05:34] It took me nine episodes reveal my true colours, but I can't and can't hide it forever. [00:05:39][5.3]

[00:05:40] A few years ago, everyone started wearing those Nike air style runners and maybe more than a few years ago now. But like, yeah, you could say using I guess you could see that trend coming as it became more and more popular, these kind of shoes, and they took off. I mean, iPhones are pretty clear and obvious example. When they started, everyone started running with them, looking at when we're at uni. The amount of people that were using Apple computers, it literally became basically the whole lecture theatre had an apple on their back, on their screen. Like, you can just see trends emerge around you. [00:06:12][31.9]

Bryce: [00:06:12] If you're just paying attention to another one AFTERPAY had asking people how do you buy that on after pay or, you know, you start seeing it more and more and websites that you're going to and taking note. Okay. Well, this is becoming more and more prevalent in the things that I'm doing. Perhaps worthwhile having a look at that. [00:06:27][14.9]

Alec: [00:06:28] Yeah. And so on. That point, I think afterpays a good example of another really useful one, which is look at what shops are promoting. Look at what they're putting at the top of their website. Look at what they're putting in their front window and the growth of after pay. You can see the amount of shops that have stickers on the front end and saying we do after pay the amount of websites that have it prominent that we offer after pay. Now, that's a really good example, but it's not just about the services that go around these retailers. It's also about the actual what goods are being sold. What they think is going to drive sales through their business based on their market research is then a good indication that those companies have good things in their future. [00:07:09][41.8]

Alec: [00:07:10] So I guess I hope we're making it clear that there is no sort of magic formula to finding stocks. And I think this is one of the parts that you and I Ren really actually enjoy about investing is looking at what's around us, looking at what people are using and then making decisions on our own, on our investing portfolio based on that, because it can be quite exhilarating, too. For example, after pack, if you came across after Payen in the early days and made sort of a judgement on what you think the trend might be over a long period, time, make a lot of money. So that's the really rewarding part of investing. Yeah. Before we kind of move on, I have one more other way in which we can find stocks. And you mentioned it a few episodes ago, but I want to unpack it from your point of view. And that's sort of around following the leader, I guess. Do you ever look at what other successful investors are buying and use that as a way to sort of emulate what they're doing? [00:07:59][49.4]

Alec: [00:08:00] Yeah. Hundred percent. Now, this comes with a really important caveat on the most part. The way that you get information about what investors are buying is always after the fact. Yeah, it's always when they write their shareholder letter at the end of the year, or maybe they own a certain amount of stock. And I have to file it with a regulator. It's always after they've bought it. There's always a time delay. And then secondly, you never understand the full context of why they're buying it. It might be part of a broader trade. You know, they might be buying after pay because they're hedging risk on a short position. They have on the buy. Now they later sector more generally. And if you only say that they're buying after pay, but you don't understand the broader trade that they're doing, then you don't have all the information. So there's some important caveats that blindly following the leader you should never do. Yeah, but we're following the leader can be really useful. Is it's a great starting point. It is like an inbuilt filtering system to say, okay, this person is buying this stock. There is obviously something there. I'm going to do my own research on that company and see what I find out. It just allows you to narrow down on companies that are obviously interesting to really insightful people. One stock to speak from my personal experience, and this isn't a buy, hold or sell recommendation, I haven't bought it, but it's one that's really interesting. Me is Heineken, the beer company. So I saw on a investors annual letter that a lot of their funds had a fair holding in Heineken in them, and they had some general commentary around an expected strength in that brand. And I did some research. So, again, you got it then taken off line and do it yourself. Heineken is growing in China and has partnered with a big Chinese brewer there. And there are a few brewers that they expected to dominate the market in China, that Heineken is having a really red hot crack. So potentially that's the sort of path that you take. You say, oh, this is interesting. They've bought this company. Do your own research and then form an investment thesis on the back of that. Those are the examples we're following. The leader helps you narrow down on interesting companies early, but you should never blindly follow. [00:10:05][125.6]

Bryce: [00:10:07] Yeah, it's interesting, I think Buffet. Warren Buffett, he put in billions into Apple. Think towards the star beginning of this year at some point. No, there are a lot of people that blindly followed him. Now, luckily, it's been it's up about 18 percent since he's jumped on it. But that's a good example of, I guess, following some of the best in the world and seeing what they are trading. But to your point, Ren definitely make sure you go and do your research, because having your own thesis about the company that you are in is incredibly important. When it comes to deciding when to sell your stock and this is something we'll talk about in a couple of episodes time. [00:10:41][33.3]

Alec: [00:10:41] Yeah. So I guess for every apple that people blindly followed Bufford into and made money. There's a craft Heine's where if people blindly followed him into that trade, they didn't make a leader. So it's just it's not worth it. It's your money. It's not his money. It's not them. Whoever his or her money, they don't feel anything. If you make a mistake and follow them into the trade, it's your money. You got to own it. [00:11:01][20.5]

Bryce: [00:11:02] So Ren, we've addressed sort of using your experiences, using where you work, using your environment, looking around you to get inspiration, to find stocks, perhaps using some of the best in the industry and seeing what they're doing to get an idea of what you might be interested in as well. But then that begs the question. Okay. So I found a few stocks, but what actually makes a good company? Is there such thing? Is there a checklist of what is a good company? Is it. Is it simply just three metrics that we look at? What is your definition? I guess we can start a good company. [00:11:34][31.8]

Alec: [00:11:35] So there are plenty of checklists. There's there's a lot of ways to make money in the market. And there's a lot of different investing styles as we've touched on. And so there are plenty of checklists out there. One that I think is particularly good. Probably you want to get a bit more knowledge before you have a crack at writing this book. But Buffett ology has an I think it's eleven. [00:11:55][20.3]

Alec: [00:11:56] Yeah, I think it's eleven. Yeah. So there are checklists, but there's no perfect checklist. And I don't think we want to spend time going through that. People can read the book. They can find other checklists in their own time. I think in a general sense, what you want to find is a company that is making money. Doing whatever they're doing is has the ability to take that money and to grow their operations in, you know, in order to make more money in the future. Which sounds simple and slightly reductive. But that is really all we're trying to do. We're trying to find companies that will be able to grow over the long term, that will be able to find more customers into more markets and make more money from each customer. And in doing so, we'll be able to return more and more money to their shareholders. Really, that's the name of the game. And it's no more complicated than that. And so if you think about what we spoke about, the start of this episode, how, you know, you got to look around and you've got to see what trends are happening, what retailers are promoting, what's at the front of mind for customers. That's literally just a shorthand to say what companies are growing their sales or growing their operations and making more and more money. And what do I think we'll be able to continue into the future? What isn't just a flash in the pan? What isn't just a fad, but where are those companies out there that are going to be out to grow for the long term and make more money? Yeah. [00:13:18][81.8]

Bryce: [00:13:18] So once you finish this series, head across to Equity Markets Investing podcast and checkout episode 46 and 47, they're entitled How to Think Like Warren Buffett, Part one and Part two. And that's where we take the cheque list from buffetology and apply it to a couple of companies that we found to see if we have found the magic company from memory. I don't think we did. But that's why it is such a good checklist, because it's probably quite difficult to actually find companies that match off against every single one in the criteria. [00:13:46][28.1]

Alec: [00:13:48] Now, the challenge is always you could find a company that ticks all eleven boxes. You could find the most on trend popular company amongst your friends that you see all through the country. Potentially it's even growing, but the share price may not move. For whatever reason. The market may not agree with you. No one bats 100, but more times than not. If you're finding those companies, those companies that can grow over time, invest the profits they're making into becoming bigger companies and make more money for their shareholders, more times than not, they're the companies that will do well for investors. [00:14:24][36.0]

Bryce: [00:14:25] So it's actually a nine question checklist Ren. I'm just reading it now. So the books are written by his daughter. Yeah. So, yeah. Head over and cheque out those episodes once you finish these episodes. Now Ren to your point. What are some things that a company needs. I guess so that it is a long term success. You spoke about finding good companies that return revenue and generate income over a longer period of time. But actually, it's not that easy. [00:14:50][25.1]

Alec: [00:14:51] I mean, it is. [00:14:52][1.1]

Bryce: [00:14:53] Oh, really? Yeah. [00:14:53][0.5]

Alec: [00:14:55] I guess if you wanted to split it into a few components, I feel like we're making our own checklist here. Maybe that's the start of something. [00:15:01][6.7]

Bryce: [00:15:02] You know, I'm thinking about things like Moat's, for example, probably a very basic concept that is is. Worthwhile discussing. [00:15:07][5.4]

Alec: [00:15:08] Well, let's let's get to that in a second, okay? So I think the first thing any company needs is strong unit economics. So what that means is that they earn more than whatever it costs to produce. Like, it's just that the business is structured in a way that can make money. I think the next thing then is they need an opportunity to expand. Yeah, there's plenty of niche businesses out there. You know, mum and dad operations, small family businesses that are great at what they do. And they have good unit economics. They make a profit every year, but they're not looking to expand. They don't have the opportunity to expand. They occupy a nation. That's what they do. [00:15:45][37.4]

Bryce: [00:15:46] So you want an industry with potential solid growth potential? [00:15:49][3.4]

Alec: [00:15:50] Correct. Because those niches aren't unless they have an opportunity to grow. They're not investable. Why do you want a company that's making money to you want a company that can then use that money to grow its operations? And then this is where the moak comes into it. So if you're killing it as a company, if you're making heaps of money, if things are going really well. Competitors are going to want a taste of that. That is the nature of the system that we exist in. And so companies that are really good investments have a really strong moat. Now, you raised it. Do you wanna explain what a moat? [00:16:20][30.7]

Bryce: [00:16:21] It's a moat is a body of water that runs around a castle. That's normally my my role is terrible jokes. [00:16:27][6.3]

Bryce: [00:16:29] But if you think about it in that sense, a moat is designed as protection for a castle. And when they pull up the drawbridge, it makes it very hard for people to come in and attack the castle because there's a big body of water between the land and that castle. So getting in there is difficult. And so if you apply that analogy to a company, you want to find companies that have their own sort of moat, so are positioned in a way that bay through their operations or their product or management or however they've managed to build their company. It's incredibly difficult for competitors to attack them and take essentially their either their customers and or sales away from them. [00:17:09][40.4]

Alec: [00:17:10] So we actually rip through some examples to show people a taste of it. So one might be they might have IP, they might have intellectual property protection, so they might have a patent on what they're doing. And so no competitor can rip them off. [00:17:24][13.4]

Bryce: [00:17:24] Yeah, they might have found technology that allows them to produce a product at an incredibly low price relative to their competitors. Yeah. [00:17:32][7.7]

Alec: [00:17:33] A company like Apple has a strong brand advantage. It's a big one. And so they customers stick with them because of the brand. Yeah. Yeah. [00:17:41][7.7]

Bryce: [00:17:42] They might have developed a piece of new technology that is so expensive that it excludes competitors coming to market. [00:17:46][4.5]

Alec: [00:17:47] Yeah, it is. Yeah. Yeah. So it's just too expensive to enter that industry. Yeah. Yeah. One that I think is particularly interesting in our technology age. It's called a network effect and essentially that means that products become more valuable the more people that use them. And then it becomes really hard for a competitor to break into that network. And the classic example of that is a company like Facebook. Facebook isn't very valuable if it's just has one user that each incremental user for Facebook makes it more valuable for all existing users. And because the value of the network comes from the amount of people on it, it becomes really hard for the next social media company to break into that network because because there's so many people on the existing network, it's so valuable already. [00:18:32][45.3]

Bryce: [00:18:33] Now it's a good one. The thing to remember with Moat's is that they're not written down on any of the balance sheets or income statements. They're not in your annual general report or, you know, spoken about by management. These are things that you need to determine as an investor as to why these businesses are so successful. And once you identify that moat, I guess if the reason you're investing in the company is based on the moat, you need to ensure that you keep track of it so that if the moat is eventually broken or goes into drought and dries up, you need to change your investing. Yes. [00:19:02][29.0]

Alec: [00:19:02] So a lot of those moats that we spoke about could break pretty easily. You know, you spoke about the cost of entering an industry being really high and that being a barrier to entry. Something could come along that makes heaps cheaper. And the example that we can think of is Amazon created Amazon Web Services, and that has made the cost of entering data heavy I.T. industries heaps cheaper because rather than having to build your own backend infrastructure, you can just use Amazon Web services so that all these companies that may have had an advantage or a barrier to entry in that industry. [00:19:36][33.8]

Alec: [00:19:37] Amazon eroded it. Similarly, Brand, you know, Nike has a really strong brand, but all you would need is, you know, something to go wrong with one of their athletes or, you know, they've obviously got a lot of problems with their supply chain. Maybe that comes out again and comes to the forefront and all of a sudden the value of the brand gets eroded. [00:19:58][20.7]

Bryce: [00:19:59] Yeah, to your point, Ren another, I guess inspiration for finding stocks is to look for disruptors. So you spoke about Amazon coming in and chain. That industry, that's another good way of finding. I mean, we're living in a world at the moment of constant disruption. So use that as some inspiration. Nice. So we've spoken about sort of three key things that we look for in good companies. Is there anything else that you think is worth mentioning, Ren before we wrap up? [00:20:23][24.9]

Alec: [00:20:24] This one's a bit nebulous, but I think it is really important. It's really tough to quantify, but the impact that good management have is is really underrated. The businesses that maybe shouldn't succeed can sometimes succeed just based on great management plans. And similarly, you can do all the analysis. You can say this business has great opportunities set in front of the great barriers to entry. Great moats. But if the management's shocking, then you're in trouble later. So it's hard to given guidance on what to look for, but have a look at who the management team are. Use your I guess, your intuition. Yeah. And really think about. Are they the right people to look after my money? Essentially, when you're buying part of the company, you're putting your faith in those people to safeguard your money and give you a return. [00:21:12][48.0]

Bryce: [00:21:12] Yeah, it's a very good point. And it's something that, you know, some of the best investors in the world, buffet and the likes, they always talk about management. But it also is one of the trickiest things to make a judgement call on. And it's sometimes not until you're invested in the company that you realise how good or bad the management is. But to your point, and we've spoken about the investor centre on company websites, they will always have information about their management teams, their history and or so, I guess, their overarching strategy for the company. So make sure you spend some time reading about them, because, you know, some people are pretty good at reading people. So trust your gut and make a call. [00:21:46][33.7]

Alec: [00:21:47] Yeah, and I think to put a bow on this whole episode, we've spoken about a lot of things that make a good company. It's really important in investing to not let perfection be the enemy of the good. Absolutely. There's a lot of really good companies out there that will take some boxes but won't tick all boxes and they will end up being very good investments. So just because a company isn't perfect doesn't mean it may not be a good investment for you. Obviously, if youre able to find just perfect companies and you know you have that analytical ability Will. Amazing. We have a job for you. [00:22:25][38.6]

Bryce: [00:22:27] But yeah, like, great. Absolutely. [00:22:29][1.7]

Alec: [00:22:30] But don't let perfection be the enemy of the good. [00:22:31][1.7]

Bryce: [00:22:32] Yes. And in some instances, you might find the best company and it might not perform well on the stock market for a number of reasons. So don't let it stop you, as we're always going to say. Just get started. You're not going to know until you dip your toes in the water and have a crack. So I guess at the end of the day, that's probably our best piece of advice. [00:22:51][19.7]

Alec: [00:22:52] Just jump in there and crack on and you're analytical ability gets better. Absolutely. As you invest more. So if you're trying to front run and do all the analytics before you make that first investment in a company, your skills aren't going to be there. Learn by doing. [00:23:06][14.3]

Bryce: [00:23:07] Absolutely. Yeah. Nice Ren. Well, as always, great to chat. Stocks and markets and all things investing with you having a great time. Hopefully we've broken yet another barrier to the investing universe and hopefully people are now well and truly on their way. [00:23:22][15.4]

Alec: [00:23:22] We're slowly draining that moat between everyday people and the world of investing. [00:23:28][5.0]

Bryce: [00:23:28] Absolutely. So that's a little bit on how to find a good company, what to sort of look for. There's plenty of information out there on this topic. Everyone has their own view. I would recommend heading to equity mate stock com forward slash baulks because there's a bunch of stuff that we've been reading on there all around this topic. And that's some great sort of lessons from some of the best investors. So cheque it out. And as we've said throughout the show, you're never going to learn more than by reading. What is it? Five books, at least just five books. It doesn't matter which five. Just five. Well, they have to be investing related, I'm sure. Maybe Ren will. Good to chat. And we'll talk next episode. Nice one. [00:24:03][35.0]

[00:24:05] Thanks for listening to get started investing. A production of acclimates media. Please remember that everything you hear and get started investing is general advice. [00:24:12][7.4]

[00:24:12] Only the content has been prepared without knowing your personal objectives, specific financial circumstances or goals. The host of Get Started Investing may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:24:12][0.0]

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