Twenty-five Rules of Investing:  1  |  2  |  3  |  4  |  5  |  6  |  7  |  8  |  9  |  10  |  11  |  12  |  13  |  14  |  15  |  16  |  17  |  18  |  19  |  20  |  21  |  22  |  23  |  24  |  25 

 

 

Buy Best-of-Breed Companies

 

 

Rule 8

In cars, we buy best of breed. Not even an issue. We pay up for the brand because we know that a brand, a good brand, signifies reliability. It signifies a higher level of service, a quality of ownership that can pay dividends for years.

Why don't so many of us feel that way in the stock market? Why are so many drawn to a Safeway (SWY) or a Kroger (KR), inferior supermarket chains, when Whole Foods Market (WFMI) is clearly the best of breed?

Why did so many people lose money in so many different audio component stores, when Best Buy (BBY) is the only company that delivers sustainable profits in that retail sector?

Why would people want to own General Motors (GM) or Ford (F), just because those stocks are down a lot, when they could own best-of-breed Toyota (TM), which is taking share and making big profits? I know they are drawn by the low dollar amount of the American carmakers, but Toyota is the cheapest and the best, a rare find.

The list goes on and on. Way too many of you are unwilling to pay up for best of breed because you think that you are getting short-changed. There are very few bargains out there in the world of secondary and tertiary players. I believe that when it comes to price-to-earnings multiple, investing in the more expensive stock is invariably worth it because you get piece of mind. That's why I say:

 

Own the best of breed; it's worth it.

 

Take Walgreen (WAG) and Rite Aid (RAD). Sure, Rite Aid seems perpetually in turnaround mode and you have to love the cheaper stock. Don't you? Not me; I have to tell you that I think Walgreen is the bargain of those two, because I never mind paying a higher price for the better company.

Forget about it. Buy best of breed. Pay up. You almost never will find yourself regretting it.