“What am I buying?”
A great question to ask anytime you are thinking about making an investment into a company is “what am I buying ownership in?” This is a great question because it makes you research the company and find out about its operations, management, structure, industry, future expectations, etc. As you look into the potential company, you may find traits that make the investment very attractive, or traits that make you very wary of the company.
One such trait that I typically look for in a company is diversity in product offering or diversity in revenue streams. No matter how great a company may appear, if the majority of their income comes solely from one product offering, that does not make for a good investment to me. It may make for a great speculation, but I don’t find much security in a company that can lose almost all income if their sole product offering becomes obsolete or is overtaken by a competitor’s product offering. I like a company that offers diversity and has multiple revenue streams.
Several years ago, I came across this infographic that shows a few major corporations and the underlying businesses that they own. I had no idea that some of these corporations had such a sweeping and broad portfolio of brands that they own. I knew Nestle was big, but outside of their chocolate business, I had no idea that they owned L’Oreal makeup or Gerber baby food. A stock owner of Nestle is getting ownership in the beverage, food, health, beauty, and clothing industries to name a few. In other words, revenues are coming from product offerings that are so diversified that if one product offering became obsolete or taken over by a competitor, Nestle is still in business. Not only do they have a broad product offering, but they sell their products around the world. They are not limited to one geographical or political environment, which provides even further security in your investment.
The point of this post is not to say only buy large corporations like the one’s listed in this infographic, but it’s to simply illustrate the importance of knowing what you’re really buying when you make an investment. As in the example above, when you buy Nestle, you’re not just buying a chocolate company. Never forget that a diverse revenue stream is not the sole determining factor in an investment. A company can offer multiple products, sell in multiple countries, and yet still be losing money hand over fist. A simple strategy that will save you a lot of time and money in the long term is to remember to only buy companies that are actually making money. Read through my previous two posts on value investing here and here for a quick glimpse into what to look for when making an investment decision. It’s amazing how often I receive a stock tip from someone for a company that has lost money the past five years. Yes, the company has a great story and it may one day make billions, but the facts show that it has not turned a profit in five years. That’s not what you want as an investment. Buy profits, not stories.