One of the most common mistakes that investors make is focusing on changes in stock prices as opposed to changes in the operating outlook of the businesses that they own. It is very easy to become fixated by the day to day fluctuations of the market at the expense of making rational investment decisions based on a company’s fundamentals. The vast majority of long-term investors could improve their results by concentrating their efforts on selecting high-quality, dividend paying businesses and worrying less about what is happening in the broader stock market.
In order to achieve better investment results immediately, consider sticking to a few very simple rules. First, if your primary goal is to earn a reasonable rate of return on invested capital (as opposed to speculation), focus only on high-quality, well-established companies that pay a dividend.
Second, allocate a substantial portion of your portfolio to leading brand stocks. Consumer loyalty and a significant brand moat are defensive characteristics that can keep a company’s operating results and stock price afloat when volatility inevitably arises in the markets and the economy is in turmoil.
Thirdly, investors should focus on easy-to-understand businesses that have a track record of creating shareholder value. Below, we outline five stocks that fit the above criteria and highlight the characteristics that long-term investors should be looking for in companies.
In addition, its primary business of selling iDevices to the world is simple and straightforward — particularly for a tech company. Apple Inc. (NASDAQ:AAPL)’s focus on design aesthetic and simplicity of use in relation to its devices has been the primary driver of its success and most investors should be able to grasp the essence of the company’s story and the fundamentals of its operating business. The natural result of such a fantastic business is a history of generating lofty shareholder returns. Over the last decade, the stock has risen well over 5,000%.
Starbucks Corporation (NASDAQ:SBUX) – This Seattle-based coffee company fits the investment framework described above to a tee. Starbucks currently sports a market cap of nearly $50 billion and is a leader in its industry. At current levels, the shares are yielding a respectable 1.30%.
The Starbucks Corporation (NASDAQ:SBUX) brand is one of the most recognizable in the world and the company enjoys a high degree of consumer loyalty. In addition, its business is extremely easy to understand and management has a superlative track record of creating long-term value for shareholders. Over the last 10 years, this leading brand stock has risen more than 430%.
NIKE, Inc. (NYSE:NKE) – Beaverton, Oregon-based apparel leader Nike is the top company in its market segment and possesses a brand that is ubiquitous throughout the world. With a market cap north of $55 billion, Nike should be considered among the highest quality companies in America and a blue-chip stock.
Its business of marketing footwear and sports apparel on a global basis is straightforward and extremely lucrative, driven in large part by the success of the brand. At current levels, the stock is yielding around 1.30%. Management also has a tremendous track record of creating shareholder value. The stock has risen around 85% over the last 5 years and is up roughly 360% during the last decade.
The goal of this article is to get investors to re-connect with the idea that stocks are not blinking green and red numbers on a screen. Rather, they represent ownership interests in operating businesses and over the long-term, the value of a stock will reflect the success or failure of the business. By following some very basic rules, investors can avoid the majority of the pitfalls inherent in the stock market.
In order to achieve superior returns over a considerable time horizon, investors should focus on high-quality, easy-to-understand businesses that pay a dividend and possess a superior brand moat. Apple Inc. (NASDAQ:AAPL), Starbucks Corporation (NASDAQ:SBUX) and NIKE, Inc. (NYSE:NKE) all fit seamlessly within this framework along with dozens of other companies that you may be overlooking.
Ryan Glosier has no position in any stocks mentioned. The Motley Fool recommends Apple, Nike, and Starbucks. The Motley Fool owns shares of Apple, Nike, and Starbucks.
The article 3 Top Brand Stocks for Prudent Investors originally appeared on Fool.com.
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