Use This Simple Rule to Pick Winning Shares
LONDON -- When it comes to investing, it's all too easy to get bogged down in technical details and miss the really obvious clues -- the evidence of our own eyes. I've developed a simple rule that has helped me identify good businesses and steer clear of bad ones.
The original 10-bagger
Between 1977 and 1990, the U.S.-based Fidelity Magellan Fund was the best-performing fund in the world. The fund's manager during this period was Peter Lynch, the man who coined the term "10-bagger."
Lynch's record as a growth investor is second to none, and in his bookOne Up on Wall Street, he explains how some of his most successful investments were the result of anecdotal evidence and personal experience, rather than stock analysts' reports.
My Lynch rule
I've developed my own version of this approach, which I've found works well for a surprising number of business: If I wouldn't want be a customer of the business, then I don't want to be a part owner of it either.
This rule made selecting some of the FTSE 100 (UKX) shares that lie at the heart of my portfolio much easier. I've written before about how virtually all of us are customers of GlaxoSmithKline (ISE: GSK.L) -- a company whose products are an integral part of the fabric of modern life.
On a more mundane but no less important note, I have been a regular Tesco (ISE: TSCO.L) customer for years. Not only is there a Tesco Express within a short walk of my house, but there's a larger store nearby, too -- and both offer the best combination of pricing and availability in my local area. Needless to say, both stores are always busy.
Similarly, my electricity and gas come from Southern Electric -- part of dividend kingSSE, while much of my diesel comes from Royal Dutch Shell (ISE: RDSB.L) , whose sustainable 4.8% yield and massive reserves give me confidence that the company will remain an attractive investment for decades to come.
In fact, there is only one FTSE 100 company in my portfolio that breaks my rule. I am pretty sure I will never be a direct customer of defense giant BAE Systems -- but I am fairly sure the government will continue to pay BAE a portion of my tax bill every year, which should be reflected in the company's excellent dividend record.
A sporting chance
Nothing illustrates the importance of keeping your eyes open when investing more clearly than Sports Direct International (ISE: SPD.L) and JJB Sports.
As their updates last week showed, these two companies may be in the same business, but they are operating in completely different worlds. Both chains have large stores in the town where I live and a visit to these shops is just as educational as a look at the companies' financials.
Sports Direct is always full of stock and bustling with customers -- you always have to queue at the till. JJB, on the other hand, is a similar size shop but carries about a quarter of the stock and has very few customers. You don't need to be an accountant to work out which company is in better health.
Expert advice
One man who knows how to identify a long-term profitable business is Neil Woodford, one of the U.K.'s most successful fund managers. Between 1996 and 2011, his stock choices rose in value by 347% -- outperforming the 42% gain of the wider market by a country mile.
Neil Woodford now manages more money for private investors than any other City manager, with a whopping 20 billion pounds of our money in his hands. In the last five years alone, his High Income fund has gained 15%, more than double the 7% return of the wider market.
The good news is that you can find all the details of eight of Neil Woodford's biggest holdings in this special free report from the Motley Fool, "8 Shares Held By Britain's Super Investor."
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The article Use This Simple Rule to Pick Winning Shares originally appeared on Fool.com.
Roland owns shares in GlaxoSmithKline, Tesco, SSE, Royal Dutch Shell, and BAE Systems. The Motley Fool owns shares of Tesco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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