Stock Market Survival Tools - Part 2

Today I'll be covering the 2nd survival tool which is Invest in expensive oars: Wealth Creators

Good for low-risk investors or the retired, is the strategy of buying wealth creators. These are companies, who on a long-term basis, continue to generate high levels of return on capital employed, require the least amount of capital, pay high dividends, have significant competitive advantages, completely write-off expenses, pay huge taxes and still manage to consistently grow revenues and profits year-after-year.

Not just dividends, the share price too grows year on year, though maybe at rates that are more mature than a pure growth play. Over the long term, these companies are real wealth creators, having thrown off income and given capital appreciation too.

And over a period of time, a small investment emerges as a pot of gold. For example, Gillette has a huge untapped market in India. The company has significant technological advantages, healthy margins and returns and, needs little money to keep its business growing, which is why it can continuously grow for many years to come.

But such companies don't come cheap. You need to pay a high price to be a part of this business as valuations are typically high for wealth creators. Companies with a consistent performance track record and capable of rewarding shareholders through handsome returns can be classified as wealth creators.

Not many manage to stay afloat on the stock market rapids. If we look at some 4,700 listed companies, less than a dozen will stay afloat on these parameters. Companies like Gillette, Proctor & Gamble, and GlaxoSmithkline, among a few others make it to this list.
However, it is not that once a wealth-creator will always be so. The company could do badly or some external factor could change the rules of the game. For example, Hindustan Lever went out of favour of the market for no fault of its own. The company was and continues to be efficient, but the big change that has happened is that its competitors have learnt the tricks of the trade and have become equally competitive.

They have managed to become negative in working capital, generate high return on capital employed, expand their distribution and supply chain in an efficient manner using the latest technology, and can now be said to be on par with Lever.

So, don't buy and forget. It is important to continuously monitor the company to ensure that its inherent strengths and competitive advantages remain in place, which in turn will enable it to consistently grow your money.