One of the golden rules of share market investing is not to see it as a get-rich-quick scheme, well not unless you bought shares in a market-leading business covered below 5 years ago.
Even if you had struck it lucky with this expectation-crushing growth superstar it would have been a mistake to not own an initially small amount of it as part of a balanced investment portfolio.
After all, not spreading your risk by buying a number of stocks is one of the most amateur investing mistakes going that is surprisingly common as many share market participants tend to ‘fall in love’ with individual stocks, be overly confident in themselves, or just want to get-rich-quick.
These attitudes are much more likely to lead to catastrophic losses, than striking it lucky with that one dream stock.
So assuming we understand the basics of share market investing, let’s take a quick look at one business that would have turned a $10,000 investment 5 years ago into nearly $270,000 today.
The a2 Milk Company Ltd (ASX: A2M) has gone from 56 cents per share on April 2 2015 to a record high of $15.10 per share today, to mean you would have made 27x your investment in just 5 years.
Rather then stewing on missing out on these kind of returns it might be worth considering a couple of qualities this business boasts that will help us find the next a2 Milk Company.
- a2 Milk’s infant formula and supermarket milk appears to have strong pricing power. In that it costs significantly more than nearly equivalent products yet normally price sensitive consumers still lap it up as evidenced by its fast-growing market share and sales. Genuine pricing power in a business is rare and means it has a competitive advantage or moat that could see it grow profits very strongly for a long time. As we’re seeing with a2.
- a2 Milk has genuinely large addressable markets, especially in China, although now latterly in the U.S.
- a2 Milk’s return on equity is 35% which means it’s a very profitable business for investors. The higher any asset’s return on equity invested the more profitable it’s likely to be for its owners.
- a2 Milk doesn’t pay a dividend and its management have reinvested operating cashflows into heavy sales and marketing for more growth, while keeping a super strong balance sheet.
Those are just a few of the signs to look for in a business that could deliver eye-watering returns for smart investors. Even though these qualities are no secret you’d be surprised at the huge number of retail investors who buy poor businesses that exhibit none of these signs.
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You can find Tom on Twitter @tommyr345
The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019