There are thousands of stocks to choose from, and this can make investing seem overwhelming. How do you pick the winners from the losers? The following three tips should make this easier for everyday investors. If an investment satisfies these conditions then it will have a much higher likelihood of generating superior long-term returns.
1. Look for companies that have secular tailwinds.
A secular tailwind is a social or economic trend that has an impact on the economy as a whole, as well as the companies that participate in it. A good example of a secular tailwind is the global transition toward electronic payments (e.g. credit cards and debit cards) at the expense of paper money transactions. This is a trend that has been going on for a long time, and it is set to continue regardless of any strength or weakness in the economy. Companies that are directly involved in facilitating this trend, such as Visa (NYSE:V), are going to benefit regardless of the strength of the economy.
When searching for secular trends to invest in you need to be careful. You need to make sure that the trend isn’t over, or close to being over. For instance there was a secular growth trend in computer sales 10 to 20 years ago, but this trend has peaked and investors can no longer profit from it easily. People still buy computers, but the number of computers sold isn’t meaningfully outpacing economic growth.
You also need to make sure that the trend hasn’t already been widely discovered by the market. Otherwise you will find yourself overpaying for stocks and justifying your actions by arguing that the secular trend will drive the stock to new highs. Secular trends often end in bubbles, which is why you want to be as early as possible and exit when the market comes to realize the power of the trend.