To make money investing, all you need to do is buy the right stocks at the right price.
As an investor, there are a number of ways to make (and lose) money. Some people like to use very complex strategies. Others tend to use common sense and easy-to-understand strategies. I'm going to explain a very straightforward -- yet difficult to implement -- investment strategy.
Generally, investing in the best company in a dying industry rarely leads to profits. And investing in an average company in a growing sector is a toss-up. It could go either way (and, of course, valuations matter).
But to get the highest returns, look for the holy trinity of investing:
- Find a sector that is showing exceptional, continuing growth
- Identify the leading company in this major growth industry
- Buy the leading company when it's cheap
Below are two examples of how this works.
(We show you more examples -- that you can buy right now -- here.)
Case 1: Apple Blossoms
- Top Sector: The number of smartphone users was ready to explode.
- Leading Company: The iPhone was unique, and Apple's other products were industry leaders too.
- Cheap Valuation: Despite its growth rate and outlook, Apple stock carried a price-to-earnings ratio nearly the same as the S&P 500. In other words, it had the same value as an average stock on the S&P 500, even though it was a leading company in a high-growth sector.
In short, if you had identified Apple in early 2009 as a company that met all three growth criteria and bought Apple shares, you would have done very well.
By 2012, Apple shares were up 400%. Compare this to about a 50% return on the S&P 500. And if you still owned those shares today, you'd be sitting on a gain of more than 500%.
Apple is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells AAPL? Learn more now.
Of course, if we could invest based on perfect hindsight, we'd all be rich. But this does show how the growth investment trifecta works.
Case 2: Baidu, China's Google
Let's use Chinese search engine giant Baidu (BIDU) - Get Report as another example to show the power of this investment strategy. Baidu is the Chinese version of Alphabet'sGoogle. The search engine's name translates to 100 (bai 百) degrees (du 度).
In early 2013, Baidu was China's biggest search engine. People were buying the company's shares for $90 each.
Alphabet is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells GOOGL? Learn more now.
Even though Baidu was already on top, it still met all three growth criteria:
1) Top Sector: The internet search industry was growing steadily and forecasts were optimistic.
2) Leading Company: Baidu operated in China, the world's fastest growing economy at the time, and had overtaken Google in China.
3) Cheap Valuation: Baidu stock's P/E ratio had dropped to 20. This was a small premium to the market, despite its long growth history and positive outlook.
From early 2013 to mid-2014, Baidu shares rose almost 200%.
Both Apple and Baidu were large, famous, successful companies. But at the time, many investors were more interested in emerging unicorns that would lead them to untold riches.
We can see now that would have been a mistake. Investing in well-managed market leaders trading at a reasonable valuation paid off.
What seems to be a basic strategy -- identify a leading sector, find the leading company in the sector, buy when the stock valuations are cheap -- is difficult in practice. Which direction is a high-growth sector is moving? Will the management team be able to ensure the company's future growth? Is the apparently attractive valuation accurately pricing in a slowdown in growth?
How to Find These Companies
Asia is full of dynamic companies that meet these criteria right now. We just issued a report that outlines three of them... click here to find out more.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.
This article is commentary by an independent contributor. At the time of publication, the author held shares of AAPL.