One of the questions I get often and one of the great dilemmas of being an investor is trying to answer the fundamental question, “What do I invest in?” You have managed to pool together enough money to put into your savings account, your RRSP and/or your TFSA. This is a hard enough task in itself. The even bigger challenge is what do you do with it? You have decided you want to invest in stocks. What kind of stocks? What kind of businesses? There are hundreds and thousands of businesses out there in the worldâ€¦forget about just your neighbourhood and country. Which ones will make money for you? How do you start to make that money you’ve saved work for you?
How To Find Stocks To Invest
At first blush, it seems like a gargantuan task and it is. It can literally freeze you in your tracks. It is at this point, you could discover that investing is not for you and you go and hire someone to make those decisions for you.
It’s at this point if you were in front of me that I would splash cold water on you to snap you out of it. The first step is not as scary if you arm yourself with some fundamentals of understanding the types of businesses out there.
If we go to first principles, we want to invest in companies that will be in business for a long time and that invest their scarce capital in products and services that society will need unconditionally. In other words, businesses that sell stuff that we can’t live without. So we need to ask ourselves, what are the things we truly need to survive on a day-to-day basis?
To survive and live a long life, we need to eat. We also need a roof to sleep under. We have a need to cloth ourselves to protect us from the elements. We need to get from point A to point B. We also need to stay healthy and protect ourselves from disease and finally we need to be able communicate with each other. Anything else is gravy. These important activities drive our existence not just periodically but on a daily basis and if we need these elements on a daily basis then there will be companies that can provide these necessities.
Below is a listing of each of these core elements and a quick mindmap listing of the potential types of businesses that serve these core necessities. We call them the core Investing Pillars. When you break it down in this manner, you can start to see the permutations and combination of businesses that emerge and can form a nice starting point in your analysis. This is just a quick scan. You can go even deeper. I’ve listed also some companies that leaders in theses spaces as a starting point. There’s a lot more than this!
- If we don’t eat or drink, we don’ live. We need to constantly eat and drink.
- We can take it a step further, to be able to grow the food, we need water. If we have no water, we have no life.
- We have different types of food which mainly consist of Produce(fruits/vegetables), Meat, and Grains.
- Companies are either involved in the growing/creating of food (Agriculture, Food conglomerates, Meat Producers) or in the business of distributing and selling (Grocers, Retail, Restaurants etc.)
Potash Corporation, Agrium, Monsanto, John Deere, Coca-Cola, Pepsi, Archer Daniels Midland, Tyson Foods, Proctor and Gamble, Mondelez, Cal-Maine Foods, Wal-Mart, Costco, Safeway, Loblaw, Sobeys, Metro Inc, American Water Company, McDonalds, Yum! Brands, Starbucks, Tim Hortons
- Unless we live in the tropics, we will need a roof to sleep under and also to store our possessions and raise our families. We can live in houses or apartments. Other companies and businesses also need a roof to build their products, store their tools and have their employees work in.
- We need people who are experts in building accommodations and also to maintain them.
- We will need materials and equipment to build these shelters. We will also need to build the infrastructure (roads, piping, sanitation, schools, fire stations, landscaping, parks etc) to support these shelters
- We need tools and products to maintain these shelters.
- These shelters will require electricity and heat to cook our food we need to survive and run our machines.
Toll Brothers, Brookfield Properties, Caterpillar, Aecon, Electrical Utilities firms, Energy producers, Solar Energy producers, Home Depot, Lowes, Rona, Wal-Mart, Cadillac Fairview, Real Estate Investment Trusts companies, Leons Furniture
- Even if we live in the tropics, we still need to have some basic element of clothing
- Bare essentials (shirts, pants, underwear, socks, shoes, hats, jackets)
- We are Persona/Lifestyle Driven (suits, dresses, jackets, sweaters, pull-overs, sporting vs casual vs formal
- Core activities include making the clothing fabrics/materials, designing clothes, manufacturing the clothes, distribute, and selling the final product off the rack.
Gildan Activewear, Wal-Mart, Costco, Target, Loblaw, Discount Retailers (Big Lots, Ross Stores, Dollarama etc) Luxury Retail (Saks, Tiffany, Coach, Michael Kors, Blue Nile, Nordstrom etc)
- We are no longer a dormant society. We need to go places not just locally but globally. Because of this the world has become a lot smaller. We are travelling for business, pleasure, and not the just the basic day-to-day “getting from A to B” activities.
- The core transportation methods are Planes, Trains, Automobiles, and Ships. Each of these forms have very complex and sophisticated supply chains that feed into the design, development and maintenance.
Boeing, General Electric, Bombardier, Siemens, Canadian Pacific, Canadian National Rail, General Motors, Ford, BMW, Daimler Benz, Magna International, CP Ships, Burlington National
- The world has also become smaller because it is much easier for us to communicate, again not just locally but with people across the globe. Unless society turns into one big North Korea, we inherently and socially need to be connected with each other. The methods of communication have changed dramatically in the past 100 years. First it was just voice via the telephone, then it was visual through TV, and now it is about transmitting data and information. Traditionally these used to be separate and distinguishable communication channels but fibre optics has allowed for huge amounts of data to be transmitted in milliseconds anywhere in the world. A simple phone can now serve all of these functions.
- The infrastructure to build these communication channels will always be needed, and will always be upgraded. Information and the ability to communicate is no different now than electricity. It’s become an important utility in our society.
BCE, Rogers, Telus, General Electric, Verizon, Cisco Systems, Qualcom, Apple, Google, Samsung, Huawei, Netflix, Amazon, Facebook, Twitter, LinkedIn, Microsoft
Health and Wellness
- At the end of the day and universal/private healthcare systems not withstanding, weâ€™re all dead but we are constantly in a struggle to stay healthy and are dependency on doctors, hospitals, and drugs will never end. In fact as our society is ageing, it looks like we will be even more dependent on health care.
- The key components are medical testing, hospital care, drugs, and medical devices
Pfizer, Merck, Glasko Smith Kline, Medtronics, Johnson & Johnson, Boston Scientific, United Health, Teva Pharmceuticals, Bristol Myers, Amgen
These are the core investing “food groups” for stocks. There are some notable absences from this group. These include.
Many futurists and Soothsayers predicted one time that technology will set society free and give us more time for leisure activities. Many have said the opposite has happened in that technology has blurred the lines between work and leisure. In either event leisure activities are becoming more prevalent, but are they critical to our survival? They may be good for our emotional well being from time to time, but on a daily basis. Could you live without movies, or music, or roller-coaster rides for an extended period? You probably could.
It feels like social media and the Internet has been with us forever, but it has only been embedded in our society for the last 15 or so years. In other words, society has survived thousands of years without it and has more than held it’s own. If we shut off the Twitters and Facebooks would society simply stop? Some experts say we would be more productive as some consider social media a major time waster or another form of entertainment.
The banks, which used to be traditionally a boring business that focussed on lending to businesses, have now become businesses with many tentacles in our economy, like wealth management, insurance, and investment banking. These businesses make a ton of money for the banks and their shareholders, but are they creating tangible wealth for society? The recent financial crisis’s has made society question the role of our financial institutions in our capitalist society. Should they return to the boring lending ways, which is providing capital to the economy? Many think so.
Many would be surprised to see technology not among the core investing pillars given how much of it runs our lives. It’s not that it’s important. It’s more that technology is more of a support tool to the core pillars. One of the misnomers of information technology is it provides solutions to problems and many companies sell technology as a solution when in most cases technology is a tool that enables businesses to generate products and service solutions. Technology is viewed as the magic button. One tap and all our troubles go away which is not true. Technology is well embedded in all the Pillars, but it is not the solution. If we took technology away, productivity would suffer but the ability to enable products generated within each of the pillars would still exist.
This is not to say that one should not invest in these types of businesses and that they do not make a significant contribution to society. There are many wonderful companies doing great things in these spaces. You just have to realize that these are secondary or complementary type businesses that may become more subject to volatility in their businesses as demand may ebb and flow than the core investing pillar companies. In other words, these types of businesses are more dependent to the Pillars and their performance may be driven by how well the Pillar companies perform.
There are a lot of businesses out there in the world and more are joining the fray every day and for investors it can be overwhelming to determine where to begin. If you begin your investment decision making by first considering what are the important necessities of life that we need to live on a daily basis, the world may look a little more rational and structured. This could allow you to drill down more effectively in finding the great companies that will deliver more durable, long term returns for your portfolio.