Stock: Fundemental of Investment

If you have some money for business ventures (I am not talking about stock investment) and you chance upon the following business opportunities, which company will you invest?

Company X
a) Operating in an uninteresting industry
b) Good management and good track record for the past 10 years
c) Impressive ROE and ROA with good P&L and low debt.
d) Consistent dividend of maybe 4% or more per year for the past 10 years
e) Good business franchise that will last almost a life time

Company Y
a) Operating in a hot and exciting industry
b) Unproven management
c) Very impressive P&L but heavily in debt
d) Little or no dividend as far as history can tell
e) Potentially a competitive industry with many new entrants coming in because of the lucrative margin

I bet most of you will choose to invest in company X. But, when we apply the same analogy to stock investing, which company will you choose to invest?

Check the track record of your stock investment. If you have to worry about your stock investment every day, it could mean only two things - your risk exposure is too high or you have invested in a company similar to Company Y. These companies may be hot today and their stock prices may be flying high. But, their profits are not sustainable and their business models are never stable. In fact, their existence could be questionable after a while when the market is no longer interested in them.

If you have invested in a company similar to Company X, why worry? Even if you were to fall into a deep sleep and wake up only after 10 years, you will still find that company around paying good returns over the years. Its stock price may be uninteresting, but the company is taking good care of your investment. Although the stock price may still rise or fall because of unprecedented events, you can rest assured that the returns will keep coming and the company will keep operating.

In a way, stock investing should be a dull and boring activity.