As investors, we want to find good investment deals that can give us faster and greater profit, at lower risk and less hassle. Ideally, we want our investments to grow by itself and increase our wealth passively, without needing us to constantly monitor and manage them. In short, we want to be ‘lazy’ investors.
Investing in fast growing companies meets our objective, because once we identify and invest into them, we can ride on the fast growth and exit after our investment goals are achieved. We’ll leave the companies’ management team to manage the operation of their own businesses. Therefore, it is important that we can identify good companies with good growth potential and invest in them at the right timing. Below are 5 basic criteria that we use to select good companies to invest in.
- Trending Industry / Business Sector
Trends can make or break a company. Companies going along the trend will enjoy extra growth momentum to their business, while companies going against the trend won’t be able to do very well and face a lot of resistance. Sunset industries are industries in the declining trend that we don’t want to get into. One example of current trending industry is the Media Tech industry, where we are experiencing a lot of growth as many conventional media businesses are either adopting technology into their business or switching towards new technology. Hence, we want to invest in companies that involved in trending businesses.
- Profitable Business Model
Profitable business model contributes funds to a company, and funds are the life blood for any company. Company needs funds to operate and grow. If a company runs at a lost for extended time period, it will eventually go bankrupt. On the other hand, the better profitability of a business, it is less likely the business in going to fail and the faster the company can grow.
The best proof of profitability is the figures from financial reports. We want to see there is a good track record of the profitability the company achieved. Track record showing consecutive growth from previous years, implicates that the company is heading towards the right direction and have the right business strategy. However, we avoid companies with inconsistent performance, where there is big difference in year to year performance, as this shows that the company may not have a good business strategy or facing some problem.
- Competitive Edge
Companies need competitive edge in their business in order to expand in their market and lock out competition, in order to secure more market share and get more business. Competitive edge includes leading market position, barrier of entry, uniqueness or products and services, proprietary technology, patents, copyrights etc. The more competitive edge a company has, the higher chance it can win over its competition. Therefore, higher chance to succeed for our investment.
- Market Size & Scalability
Bigger market size means bigger potential business a company can have in the future. Regional market is preferred over local market. For example, Malaysia has around 30 million population, so the market size is limited to 30 million. The best case scenario is a business that can access the global market.
With large market size is not enough, a company needs to also have good plans to scale their business. The scalability of a business model is also another important factor to consider.
- Capable Management Team
If a company is a vehicle we ride on, then the company’s management team is the driver responsible to drive the company towards the desired destination. With capable team, we are more assured that we can reach our destination faster, and not get lost somewhere in between.
How do we know if the team is capable or not? We look at criteria such as experience of key persons, unity of the team, good leadership, core values and available networks resources of the team.