It’s the stock of exceptional companies that usually provide for incredible investment returns over the long-term. Unfortunately, it’s easy to get distracted by the noise of today, zeroing in on earnings reports, talking-heads, commentary, moving averages, interest rates, inflation, and all the like.
“Did my stock beat on earnings?” “The company guided-down on its current year outlook. Should I sell?” “Jim Cramer said to “sell, sell, sell” during the Lightning Round on Mad Money.” “Uh oh! All the analysts just downgraded my stock.”
All these are short-term, emotional distractions.
The 4-legged stool
When you start to doubt or get to feeling anxious (and trust me, you will), I encourage you to take a step back and look at the big picture. Consider why you purchased the stock in the first place. You want to ensure your stock is a four-legged stool that:
- Cares for its employees
- Cares for its customers
- Is shareholder-friendly
- Provides value to society
Often times, a quick mental walk-through of the “four-legged stool test” will provide peace of mind during a bear market. If your stock is wobbling on three legs or less, it may be an indication you shouldn’t be in it.
Caring for employees
What is a company without its employees? You can’t determine if a company cares for its employees by looking at the Income Statement or Balance Sheet.
It’s easy to lose sight of this as an investor, but there are associates behind the counter, workers in the warehouse, and drivers in the trucks that make business happen. There would be no revenue, earnings, or dividends without the individual employee.
You don’t want to own stock in a company that treats its employees poorly. Reputation takes a hit, attrition becomes a problem, company culture suffers, not to mention the human aspect. A company with declining employee morale is sure to see a declining stock price shortly thereafter.
There are a numerous resources you can use to gain a sense of how a company treats its employees:
- Glassdoor – provides reviews, ratings, and recommendations on individual companies
- Yahoo Finance, CNBC, or other financial news site – for articles and commentary
- Investor Relations website – for press releases, investor presentations, and SEC filings
- Personal experience – what’s the culture like when you visit Dollar General, for example?
Generally speaking, no news is good news when it comes to employees. Unionization efforts or pending lawsuits are reasons to be cautious.
Caring for customers
It’s a bit easier to determine if a company cares for its customers. Investors can draw from personal experience and/or read reviews on Reddit, Sitejabber or other similar resource. It goes without saying, but an exceptional company takes care of its customers.
What’s the return policy? Can you get in touch with customer service? Is the company timely in their response? When you speak with a representative, are they knowledgeable? All these questions are important to consider prior to purchasing a company’s stock.
Shareholder friendly
If a company is friendly to employees and customers but not to shareholders, you’re going to want to pass on the investment. I like to look for one or more of the following to quickly determine if a company is shareholder friendly:
- The stock pays a dividend
- The company is repurchasing shares
- Stock-based compensation (SBC) is reasonable and not diluting shareholders
- Total number of shares outstanding is decreasing over time
Of course, a stock can still represent a good investment without hitting one or more of these criteria, but it’s a good test to gauge a company’s friendliness toward shareholders.
Providing value to society
Lastly, you’ll want to ensure your company provides a product or service that’s beneficial to society. The definition of “value” will differ from investor to investor. After all, what’s important to me may not be what’s important to you. You may think Facebook (META) provides value to society while I may not. Or perhaps you’re a tobacco user and like Philip Morris (PM), but I take an opposite stance.
Whatever the case, be sure to incorporate individuality into your investing philosophy. Doing so will help you build conviction in your stock picks, and it takes strong conviction to stick with your picks for the long-term.
