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Five Rules for Buying Stocks

4 - Buy Stocks with Great Leadership

At the end of the day, the success or failure of a company in large part relies on the leadership and vision of its top executives. Growth comes from the top, not from random successes at a smattering of stores that trickles upwards. When you buy a stock, you have to realize that you're buying its management too.

Consider the successes and failures of Apple (AAPL - Get Report) over the last two decades.

In the early 1990s, Apple was considered a second banana to Microsoft (MSFT). Windows rolled out cheaply and on a massive scale as Apple clung to high profit margins and a controlling, proprietary outlook.

On July 9, 1997, after three years of poor stock performance and crippling financial losses, the Apple board of directors placed Steve Jobs at the helm as CEO and began restructuring the company's product line. What followed over the next 10 years was a parade of Apple successes -- the iMac, the iPod and iTunes, Apple retail stores and the iPhone.

A more recent example is Southwest Airlines (LUV - Get Report), headed by CEO Gary C. Kelly since 2004.

Kelly's leadership has made Southwest an anomaly in the airline industry, with the ticketing almost all its berths directly over the phone or online at the company's website. Unlike other major airlines, Southwest also allows passengers to change reservations without additional cost and has refused to charge fees for many items, such as checked baggage, despite industry trends.

The result has been unparalleled success for the airline over its competitors. Southwest Airlines has carried more customers than any other U.S. airline since August 2006 for combined domestic and international passengers, according to the U.S. Department of Transportation. LUV stock is up almost 90% in the last year, compared to a gain of just 25% for the broader market.

Sure, there are stocks that succeed because they manage to cut costs and boost margins. But such a strategy can not keep a stock healthy and growing for long. If you want to invest smartly, make sure your simple trading strategies include investing in smart leadership with a proven record of success and a willingness to challenge industry norms to get ahead.

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