My Secret to Finding Great Companies
In this post, I am going to share my secret to finding great companies among the millions of companies out there. (ok, I tried to be clickbait-y but it feels weird.) Actually, I share about this quite openly with my students in my online course, and even with the public.
In the last post, we discussed how most people should invest. You want to read it first before continuing to this post.
However, I don’t observe many following this “secret” of mine. I frankly don’t know why people choose not to follow a good path to investing success. So I will use this post to share again and hopefully, people take heed.
I can bring the cow to the water, but I can’t force it to drink
A wise men
How Do You Find Great Companies?
There are two types of great companies.
1. Already proven to be great
2. Could be great in the future.
To find such companies, I use a simple question as a filter before I continue researching further.
Can this company scale and sell globally?
Why This Question?
Quite simple actually. I want to invest in companies that can grow their business and profits. The faster and larger the better! And in order to do that, you need a company that can scale and sell globally.
You Need Numbers to Scale
And such companies are often found in countries with large population size, because most companies are geographically biased to their own country. Most of their business will be conducted in their own country, even if they have branches overseas.
Therefore, if the company is in a small country, it is hard for them to scale as the customer pool, which is the country population, is limited.
This is also one of the reason I don’t invest much in my own country, Singapore. Because our population is small. Less than 6 million (including non citizens), and most of our listed companies are too focused in the local market with the exception of a few.
If Can’t Scale, Must Sell Globally
However, there are many companies that defy the need for starting in a large country. For example, Israel and Hong Kong have relatively small population of 8 million and 7 million respectively. Yet, there are many companies that are worth multi-billions from these two places.
The main reason is “While they cannot scale locally, their product sells globally.” Israeli companies are mostly tech companies with products that easily sell to overseas market. Hong Kong companies are mostly finance-related, and financial products are sold globally with ease.
While there are many examples to illustrate the importance of a company’s ability to scale and sell globally. Let’s take a look at an example.
Autobacs and Autozone are retailers of automotive parts. Their business is largely similar, even their name is similar! With the exception that Autobacs is mostly in Japan with some overseas branches in Asia and France, while Autozone is mainly a retailer in USA.
Without referring to Google your answer, can you make a guess which company’s share price performed better in the last 5 years?
The answer is Autozone.
If you invested in Autozone for the last 5 years, you would have returned 122% while Autobacs only returned a measly 9%.
That is more than 10 times difference for selling the same thing!
While there are many other factors to consider, the main reason, I believe, is that population size of USA as compared to Japan. USA is around 320 million while Japan is around 120 million.
And if you google for other companies, you will see very similar results.
I hope this shed some light on how to invest successfully!
P.S. Sorry, I missed a day of posting because I was on a weekend vacation with my family and I thought that was more important! But now I am back! Daily posting for 1 year!
