My Golden Rule of Investing:
Companies that grow revenues and earnings will see share prices grow over time.
For examples:
Starbucks has had phenomenal success at turning coffee - a simple product that used to be practically given away - into a premium product that people are willing to pay up for. Starbucks has enjoyed handsome growth in number of stores, profits and share price. Starbucks also has a respectable return on capital of near 11% today.
Meanwhile, Sears has languished. It has had a difficult time competing with discount stores and strip malls, and it has not enjoyed any meaningful profit growth in years. Plus, its return on capital rarely tops 5%. As a result, it stock has bounced around without really going anywhere in decades.
Over the long term
Over the long term, when a company does well, your interest in that company will also do well.
Stocks are ownership interests in companies. Being a stockholder is being a partial owner of a company.
Over the long term, a company's business performance and its share price will converge.
The market rewards companies that earn high returns on capital over a long period.
Companies that earn low returns may get an occasional bounce in the short term, but their long-term performance will be just as miserable as their returns on capital.
The wealth a company creates - as measured by returns on capital - will find its way to shareholders over the long term in the form of dividends or stock appreciation.
Companies that grow revenues and earnings will see share prices grow over time.
- Over the long term, when companies perform well, their shares will do so too.
- When a company's business suffers, the stock will also suffer.
For examples:
Starbucks has had phenomenal success at turning coffee - a simple product that used to be practically given away - into a premium product that people are willing to pay up for. Starbucks has enjoyed handsome growth in number of stores, profits and share price. Starbucks also has a respectable return on capital of near 11% today.
Meanwhile, Sears has languished. It has had a difficult time competing with discount stores and strip malls, and it has not enjoyed any meaningful profit growth in years. Plus, its return on capital rarely tops 5%. As a result, it stock has bounced around without really going anywhere in decades.
Over the long term
Over the long term, when a company does well, your interest in that company will also do well.
Stocks are ownership interests in companies. Being a stockholder is being a partial owner of a company.
Over the long term, a company's business performance and its share price will converge.
The market rewards companies that earn high returns on capital over a long period.
Companies that earn low returns may get an occasional bounce in the short term, but their long-term performance will be just as miserable as their returns on capital.
The wealth a company creates - as measured by returns on capital - will find its way to shareholders over the long term in the form of dividends or stock appreciation.
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