Successful Investments Start With These Five Questions...

Successful Investments Start With These Five Questions... By Mike Barrett, analyst, Extreme Value Friday, October 9, 2015

Finding successful investments is hard work. My colleague Dan Ferris and I routinely evaluate dozens of companies before finding a few that are worthy of additional research. Unfortunately, that means we probably spend more time reading about businesses that we don't recommend than reading about those we do. Often, our research begins with a company's annual report. To achieve transparency with investors, public companies are required to file these reports with the U.S. Securities and Exchange Commission (SEC), which refers to them as "10-Ks." Annual reports provide a wealth of valuable data. Better yet, the data are accessible 24/7 on the SEC website. These reports are often 100-150 pages long and contain a mind-boggling array of numbers. Our challenge is to quickly separate what's important from what's not. Or as Arthur Conan Doyle's famous fictional sleuth Sherlock Holmes says… It is of the highest importance in the art of detection to be able to recognize, out of a number of facts, which are incidental and which vital. How do you separate "incidental" from "vital" in a document loaded with thousands of seemingly important facts? You must have a plan. I have read thousands of annual reports in my investing career. Over time, I've developed a system that helps me quickly assess if a company is worthy of further study. My system starts with these five questions…  Are there risks related to the company's revenue stream that aren't readily apparent? Are there other unusual risk factors? Has the company demonstrated that it can grow revenue and earnings? Is there evidence of operating leverage? Is the company generating free cash flow? Let's look at each individually… Question No. 1: Are there risks related to the company's revenue stream that aren't readily apparent?  Typically, an overview of the business and how it generates revenue can be found within the first few pages of an annual report. Spend some time there. I specifically look for two risks…  •   Heavy dependence on just one or a few customers. •   Hidden exposure to commodity prices.   Customer Concentration  Ideally, we're looking for companies that sell to many, many customers. This limits the risk that revenue might suddenly decline from the loss of any one customer. It also limits the leverage any one company can have on the business. Raising prices on a customer that's responsible for 60% of your business will always be a challenge.  Be aware that some industries routinely experience high customer concentration. Food manufacturers like Hain Celestial Group often report Wal-Mart as a major customer (10% or more of sales).  Suppliers of original equipment manufacturer (OEM) auto parts typically have high exposure to one or more of the major car manufacturers. BorgWarner, for instance, reports that 17% of its 2014 sales were made to beleaguered Volkswagen.  Companies in the semiconductor industry also routinely experience high exposure to just a few customers. Cirrus Logic is an extreme example. In 2014, 72% of its sales were made to a single customer, Apple.  Exposure to Commodity Prices  In addition to assessing customer concentration, you also want to determine if there is hidden exposure to cyclical commodities, like oil and gas.  Remember, a company doesn't have to be in the oil and gas business to have significant exposure to its boom and bust cycle. Last November, I addressed this problem in the Stansberry Digest.  Oil prices were starting to fall hard. I warned investors they might be unwittingly exposed if they owned companies that did a significant amount of business with oil and gas producers. Here's what I said at the time…  I've looked closely at hundreds of companies over the past year and I'm continually surprised at the reach of the American oil industry. The manufacturing and global distribution of oil-extraction tools and parts – paired with the transport of crude-oil products – generates billions in revenue for thousands of American companies. If you own some of these companies (or own mutual funds that hold large positions in them), you're more exposed than you think. If oil continues to fall, your portfolio could take an unexpected hit. [One] blue-chip stock that lots of individuals and funds hold is Emerson Electric. Emerson is a global industrial powerhouse operating separate divisions in industrial automation, network power, and climate technologies. Emerson's process management segment has been the primary source of revenue growth over the past few years, thanks to surging demand from oil and gas customers. This division accounts for 35% of Emerson's revenue. A sustained slowdown in domestic oil production (a byproduct of plunging prices) would hurt Emerson's profitability. After I wrote that, the drop in oil prices did resume. And Emerson's stock price has dropped about 29% since then.  Question No. 2: Are there other unusual risk factors?  Toward the middle of a typical annual report, you'll find the Risk Factors section. Here, a company identifies and lists the primary risks for its business.  Many of these risks are generally the same from company to company. For instance, if a recession appears, sales are likely to decline. If another company is acquired, the integration may underperform the expectations management has set.  What I'm looking for are unique risks. Here's an example from the 2014 10-K of Molina Healthcare, which provides health care plans to more than two million members across the U.S. (emphasis added)…  Our profitability depends to a significant degree on our ability to accurately predict and effectively manage our medical care costs. Historically, our medical care cost ratio, meaning our medical care costs as a percentage of our premium revenue net of premium tax, has fluctuated substantially, and has also varied across our state health plans. Because the premium payments we receive are generally fixed in advance and we operate with a narrow profit margin, relatively small changes in our medical care cost ratio can create significant changes in our overall financial results. For example, if our overall medical care ratio for the year ended December 31, 2014 of 89.5% had been one percentage point higher, or 90.5%, our net income from continuing operations for the year ended December 31, 2014 would have been approximately $0.12 per diluted share rather than our actual income from continuing operations of $1.30 per diluted share, a decrease of approximately 91%. This is something you don't see every day – a change of one percentage point in expenses potentially reduces income 91%! No matter how attractive Molina might otherwise be, this vital fact about its business model was a deal-breaker for me.  Question No. 3: Has the company demonstrated that it can grow revenue and earnings?  Near the Risk Factors section, you'll usually find a financial review covering the past five years. This lets you quickly see whether the company has been successful at growing sales and profits.  Growth in these two metrics is vital because it typically means the products and services the company sells are enjoying greater demand over time. Companies that get bigger and better are exactly what we're looking for.  Acxiom is an example of a company that has not been growing revenue or earnings. The provider of enterprise software has been around for more than 40 years, but sales the past two years were actually lower than they were five years ago. Earnings also trended down during this period.  By glancing at Acxiom's five-year financial history just a few minutes into my research, I was able to quickly eliminate it from consideration.  Question No. 4: Is there evidence of operating leverage?  Operating leverage is simply the ability to grow profits faster than revenue.  Superior business models often grow profits faster than revenue, so I consider this a vital fact that helps me quickly determine whether a particular company is worth further evaluation.  Fleetmatics provides fleet management software services to 25,000 enterprise customers with large truck fleets. It's a textbook example of operating leverage. Over the past five years, revenue grew about 37% per year on average. Income grew a much faster 85% per year on average.  Adding lots of new fleet customers didn't require the company to build a new plant. It just needed room for a few new employees and their computers. Capital-light businesses such as Fleetmatics routinely demonstrate operating leverage.  Investors love rapidly growing companies that can grow earnings quickly. They regularly pay dear prices to own them. That's why these kinds of companies are rarely found in the Extreme Value model portfolio. Ideally, we look to buy these kinds of businesses during major market downturns when everything goes on sale.  Question No. 5: Is the company generating free cash flow?  The last thing I look for when starting the evaluation of a new company is its ability to generate free cash flow.  This can be easily determined by going to the Statement of Cash Flows, which normally follows the Balance Sheet and Income Statement about two-thirds of the way into a typical annual report.  Free cash flow is not a line item on the cash-flow statement. Instead, it has to be calculated by deducting expenditures for property and equipment (i.e. capital expenditures, or "CapEx") from net cash from operations (or operating cash flow).  As Dan likes to say, free cash flow is what gives equity its value. This is the surplus capital management has at its disposal to grow the business, reduce debt, and give back to shareholders via dividends and share repurchases.  The cash-flow statement in an annual report normally covers the last three years. Ideally, what I'm looking for is growing free-cash-flow generation over that period. If a company was unable to generate even a moderate amount of free cash flow over the last three years, I usually lose interest in it as a potential investment idea.  There are almost 7,000 companies listed on the three major U.S. stock exchanges: NYSE, Nasdaq, and Amex. Finding the handful of businesses that will translate into successful investments is hard work.  Having a plan like the one outlined above helps us eliminate many subpar businesses from consideration quickly… and focuses our attention on those that are worthy of your investment capital.  As you conduct your own research, I highly recommend you follow this guide.  Good investing,  Mike Barrett Source: Daily Wealth Follow us on Twitter: @blacklioncm

Four Easy Steps to Banish Fear and Change Your Life, Today

Four Easy Steps to Banish Fear and Change Your Life, Today By Mark Ford, founder, The Palm Beach Research Group Wednesday, September 9, 2015

I used to dread the thought of public speaking. And when I was forced to make a speech, I did a terrible job – which only made me dread the next speech even more. It was a vicious cycle. When I became the editorial director of a newsletter business in South Florida in 1982, I found myself in an uncomfortable position… I had to conduct meetings and give presentations at industry functions on a fairly regular basis – something I was ill-prepared to do. So, I decided to enroll in a Dale Carnegie program for public speaking. Somehow, I registered for the wrong course. Instead of focusing on speech-making, it had a broader goal. And that program changed my life. It taught me the importance of setting goals and taking action. But it also taught me to be more comfortable as a speaker.  My speech-making skills improved almost accidentally.  Every week, we had to read a chapter of Carnegie's classic book, How to Win Friends and Influence People, and then make a two-minute in-class presentation about how we were going to put the principle of that chapter to work in our lives.  On Thursday evenings after work, I would drive a half-hour to the meeting place.  During that drive, I thought about what I was going to say. It was difficult in the beginning, but it got a little easier each week. By the end of the 14-week course, I was performing at a near-professional level. I had won several awards in competitions and was routinely rated at the top of the class.  The final session was a sort of commencement ceremony. Relatives and friends were allowed to attend, which tripled the size of the audience we had to speak to. I gave the last speech. I was still a little nervous when I got up to the podium, but I'd learned a lot by then.  So, I took a deep breath and did my thing. I got a strong round of applause. Several people I didn't even know came up to congratulate me… and one suggested I should become a comedian.  I wasn't foolish enough to take his advice to heart, but it did make me happy to think I had made so much progress in so little time, starting from practically zero.  How did I conquer my fear of public speaking?  The same way you would conquer the fear of anything else.  Humiliation and Humility  A big part of what we are afraid of is embarrassment – being shamed in front of other people. When embarrassment is extreme, we call it humiliation.  If you pass gas at a fancy dinner party, you feel embarrassed. If your big project at work fails miserably – and you've been bragging it would be a "sure thing" – you feel humiliated.  Humiliation is what happens to embarrassment when it's mixed with pride. The prouder you are, the more failure hurts.  Which brings us to our cure for the fear of failure: humility.  I'm guilty of priding myself. I'm proud of my writing, for example, and the success I've had in business. So, I have to keep reminding myself to be humble about those things.  But I'm not proud of everything I do.  I take no pride in my ability to dance, sing, or speak foreign languages because I do those things so badly. And because my ego isn't involved, I'm not embarrassed to ask stupid questions, to show myself as a beginner, and, ultimately, to fail again and again as I attempt to master those skills.  The truth is, when I started out in business, I wasn't very good at that, either.  Again, that made it possible for me to ask lots of questions, look stupid, and make mistakes… which accelerated my learning curve.  That last observation brings us to an important principle of success. I call it "the secret of accelerated failure." It's a principle I developed in the early 1990s.  The principle of accelerated failure is this: To develop any complex skill, you must be willing to make mistakes and endure failures. The faster you can make those mistakes and suffer those failures, the quicker you will master the skill.  At the Palm Beach Research Group, we teach this secret to our managers.  We encourage them to allow their employees to fail. Not to fail stupidly. Not to make the same mistakes over and over again. But to feel free to fail at something – so long as it was done in the pursuit of knowledge.  If you play golf or practice Brazilian jiu-jitsu, you know this to be true: If you tense up and focus on avoiding mistakes, you will learn very slowly. If you relax, let the mistakes happen, and learn from them, you will advance quickly.  It starts with being humble. Humble enough to accept the fact that when you begin anything new, you're likely to do it poorly.  Humility Is Nature's First Gift  Pride prevents us from admitting we are incompetent. But we're all incompetent when we're learning.  Think of how a baby learns to walk. He begins by crawling, then advances to "forward falling" (as my brother calls it), then to walking like a little drunkard, and then, finally, to walking masterfully.  Babies don't feel shame, because they're not proud.  There's a reason pride doesn't invade the human psyche until 6 or 7 years of age: There's simply too much to learn before then.  If toddlers had pride, it would take them years – or even decades – to walk and talk properly.  Humility is a much-underrated virtue. It provides us with at least three significant advantages:  •   It makes us more endearing. Humble people, especially accomplished individuals who remain humble, are well-liked.      •   It makes it easier to get cooperation. Humble people get more cooperation from others because they don't try to force strong-minded people to accept their ideas.     •   It makes learning easier and faster. Humble people are able to ask questions, make mistakes, and experience failures without embarrassment. This attracts good people to them who want to help. Humble people get the best teachers and get the most from them. If Humility Is the Solution, How Does a Proud Person Become Humble?  Now we are coming to the most important part of this discussion – a practical plan for defeating the fear of failure.  Here's how you can do it:   1.   Begin by accepting the truth. You're a good person, but that doesn't mean you are naturally good at everything. Look in the mirror and think about the skill you want to accomplish.        Say out loud, "I accept the fact that right now, I am incompetent at (name the skill)." Repeat this exercise until it doesn't hurt.     2.   Admit your incompetence to an indifferent audience. Once you can say it in front of a mirror, say it in front of a living human being. Begin by admitting your incompetence to someone who doesn't care.        Admit to your Spanish teacher you are incompetent at public speaking. Admit to your public speaking coach you are incompetent at speaking Spanish. Repeat this exercise until you can do it with grace and good humor.      3.   Next, admit your incompetence to a judgmental audience. Admit you are no good at languages to your Spanish teacher. Admit you have two left feet to your dance instructor. Do this not once, but every time you make a mistake or fail in some way. Do it with grace and good humor. As pop psychologists say, "own" the feeling.      4.   Admit your incompetence to someone who can punish you. This is the ultimate test. The next time you volunteer for a difficult assignment at work, admit to your boss you might fail before you succeed. Do it with grace and good humor, and you will be amazed at the result.         Your boss won't can you on the spot. (Unless he is reallyincompetent.) Rather, he will admire you for your humility. After all, he knows you are not yet competent. All he wants is your commitment to carry on until you are.         I've found the most productive and successful executives are very comfortable about saying, "I'm going to try such and such. I'll probably screw it up completely. But if I eventually succeed… just think what good will come of it!" Defeat your fear of failure by being happy – and even eager – to try and fail until you succeed.  That's how Edison invented the lightbulb. That's how Michael Jordan, a very mediocre basketball player in high school, became the greatest hoops player of all time.  They weren't afraid of failure.  You shouldn't be, either.  Regards,  Mark Ford  Source: Daily Wealth Follow us on Twitter: @blacklioncm

Investment Advice TO a World Champ

Investment Advice TO a World Champ By Dr. Steve Sjuggerud Tuesday, January 13, 2015

I met a legend over the weekend… He's a now-retired international sports hero. I don't want to share his name today, because he told me quietly that he could use some financial help, and he probably wouldn't want that word out in public. I didn't really answer him when we were together. But as I thought about it later, the right advice for him is the same advice that I would give to you… This is serious stuff. I urge you to take it seriously, and commit these ideas to memory. Let's get started:  1. Nobody will care more about your finances than you.  This is critical for you to embrace, immediately. Nobody is going to care more about your finances than you. You simply can't just find somebody smart and hand your money responsibilities off to them.  You can't just hand off your life and hope it goes okay – this is your life we're talking about! How many rock stars and sports stars have you read about that are broke today because they handed off this responsibility? Don't do it.  The quicker you take control and ultimate responsibility with your money, the quicker you will start building your legitimate fortune. And you can't ever give up that responsibility.  Let me be clear… It is alright – even smart – to work with smart people, and to delegate some of your money responsibilities to carefully chosen people. The important part is, you just can't "check out." You have to be the team captain here… the captain of your money ship.  2. There is no magic bullet, or shortcut.  You didn't become a sports legend by taking shortcuts. You had to work harder than the next guy, learn more than him, and focus with more intensity than the next guy to achieve your goals.  If you want to invest successfully, you have to do the same thing. You can't get by on one hot tip after another. The shortcuts don't work. This leads us to the third idea…  3. If you don't understand it, don't buy it.  It's easy to get dazzled by promises of big profits… It's even easier to get sucked in when the promises are accompanied by slick brochures and fast talk with a lot of words that you don't understand.  You'll save yourself a lot of loss (and time) if you remember this: If you don't understand it, don't buy it. Don't ever cheat on this one. It will cost you.  4. Buy investments that are 1) cheap, 2) hated, AND 3) in an uptrend.  I've built my wealth and reputation on this philosophy. In short, you can't buy what's already incredibly popular – because if you do, chances are you've already missed it. Instead, you have to buy what people are skeptical of.  Separately, waiting for an uptrend is a crucial part of this strategy as well… It helps take the risk out of the idea, and it helps "confirm" that your investment thesis is "right."  If you want my opinion today, property is probably your best bet. Here's why:  It's surprisingly affordable (when you factor in today's record-low interest rates). I say "surprisingly" because most people look at house prices versus incomes, and they wrongly assume that house prices are expensive. The correct way to look at it is relative to monthly payments (interest rates). And based on that, house prices are plenty affordable after all.  Also, investors are skeptical about property now, wrongly thinking that it is overpriced. (So it is hated – or at least not loved). AND property is in an uptrend. PERFECT.  Best of all, you can understand it. You hold the keys, you paint the walls… with YOUR property, you control your destiny.  My money is where my mouth is with this one… Back in 2010, I owned no property outside of my home. Today, property makes up the biggest percentage of my own financial assets – by far.  Property is what I'm doing with my own money.  You will always hear about ways to make higher returns, or faster ways to make a buck, than property. But chances are today you'd be risking much more than you can imagine, relative to the potential reward. It's simply not worth it.  Again, right now, property is affordable, unloved, in an uptrend, and understandable. You control your destiny, to a better degree than with other investments. Particularly if you are not an expert in investing, and don't intend to be, then property makes sense for you.  I could go on and on about "do's" and "don'ts" when it comes to your money… But I won't.  Instead, let's leave it at these simple-but-absolutely-critical points…  1. Nobody will care more about your situation than you, so don't hand off your finances. 2. There is no magic bullet or shortcut. (The "hot tip" doesn't exist.) 3. If you don't understand it, don't buy it. (If it sounds too good to be true, it probably is.) 4. Buy investments that are cheap, hated, and that have started their uptrend. That's it. Commit these points to memory.  Again, property, right now, ticks a lot of these boxes. That's where I'd suggest you start…  Good investing,  Steve Source: Daily Wealth Follow us on Twitter: @blacklioncm

The Most Important Wealth Secret You'll Ever Learn

The Most Important Wealth Secret You'll Ever Learn 
By Chris Hunter,

What you are about to read flies in the face of everything your stockbroker or Wall Street adviser will tell you. 

It's about the closest thing to heresy you can get in the investing world... and the newsletter business. It's also a key insight if you want to stay wealthy over time. 

It is simply this: Stock picking alone won't help you hold on to wealth. 

Unless you are very lucky... or very, very talented... you will struggle to pick the right stocks at the right time ALL the time. You will make mistakes. You will mess things up. 

And unless you have the right discipline in place, sooner or later you will lose money. 

That discipline is called "asset allocation." That sounds technical. But it's really just about how you spread your wealth over different types of investments. 

This is backed by hard data. 

For instance, a well-known study in 2000 by Yale professor of finance Roger Ibbotson and Paul Kaplan of Morningstar showed that differences in asset allocation among mutual funds explained virtually all of the variance in their returns. 

Differences in stock picks made virtually no difference to the variance in portfolio returns. 

Common Sense Decisions
It's common sense, but you don't put 100% of your wealth in stocks in a savage bear market. 

And you don't invest 100% of your wealth in bonds in times of runaway inflation. 

This seems straightforward. But you'd be surprised how many investors skip over these fundamental decisions in the rush for the latest "hot stock." 

This is nearly always a bad idea. 

Before you even think about picking which individual stocks to own, you have three decisions to make. These are the three most important decisions you make as an investor. 

1) Which assets to hold in your portfolio 

2) In what proportions to hold them 

3) When to change those proportions 

Get these three decisions right, and long-term wealth creation and preservation will follow. Get them wrong, and you are unlikely to hold on to what you've worked hard to earn and save. 

So what makes for a good asset allocation? 

Today, I'd like to share with you what we've learned so far at Bill's family wealth advisory service, Bonner & Partners Family Office... where our goal is long-term wealth preservation. 

7 Rules of Successful Asset Allocation
1) It will have a cash buffer – Having cash on board makes it easier to deal with a major downturn and the losses that come with it. Remember, you want to make sure you are not forced into dumping your investments in times of market stress. 

The more cash you hold, the more of a buffer you have. Having cash on board also allows you to go bargain hunting when investments go on sale. In times of crisis, having enough cash to buy beaten-down assets is essential. 

2) It will be an inflation beater – Your asset allocation must allow you to stay ahead of consumer price inflation. There is little use in putting together a portfolio that gets eaten away by inflation. 

This is especially important given the sky-high deficits most advanced economies are running and the widespread money printing central banks are engaging in. We may not see a lot of inflation show up now. But that doesn't mean it won't show up in the future. 

3) It will be able to withstand currency depreciation – This is particularly important if you are internationally mobile, as many Bonner & Partners Family Office members are. 

There is no point in making big portfolio gains in a currency that is losing value. Or for that matter, leaving a portfolio vulnerable to the collapse of a currency (something that is now being talked about openly in the case of the euro). 

4) It will be properly diversified – A prudent long-term portfolio will contain a mix of asset classes that reduce risk. It will also be well diversified within asset classes. 

For example, the money you have in stocks should be diversified across sectors and geographies. Having all your stock market investments in Japanese nuclear stocks, for example, is a bad idea, even if you have only 10% of your total wealth invested in stocks. 

5) It will take advantage of the "bargain counter" – The individual assets you own should only be bought when they are selling at what we like to call the "bargain counter." 

If you buy when an asset is expensive you expose your portfolio to the risk of a large capital loss. Buying assets when they are selling at a discount to their estimated fair value increases your margin of safety. 

6) It will follow sensible "position sizing" rules – Position sizing answers the question "How much should I own?" 

The answer to this question varies. But as a general rule, never put more than 3% of your overall capital at risk on one stock position. This is one of the most effective ways of reducing the risk of a ruinous loss to your portfolio. 

7) It will contain plenty of "off market" assets – "Off market" assets are assets that don't trade on a public exchange... things such as real estate, gems and stakes in private business ventures. 

Putting all your money at risk in the financial markets (whether in stock markets, commodity markets, bond markets or currency markets) is too much of a risk. 

For instance, owning a quality house... bought at a good value and soundly financed... is an excellent way of reducing overall portfolio risk. If you go about it right, you should own the home outright by retirement. 

Owning a home debt free is one of the best protectors against financial crisis that there is. Owning a private business or investing in one is another great way to earn high returns on your capital. 

The Icing and the Cake
Asset allocation is how serious investors think about investing. 

At Bonner & Partners Family Office we call the returns you get from your asset allocation decisions "beta." 

Beta is the result you get from getting the big trend right. 

Once you've got your beta right, it's time to look at boosting those returns. We call this "alpha." Alpha is what you get by choosing the individual investments (stocks, bonds, etc.) best positioned to profit from the big trends. 

Beta is the cake. Alpha is the icing on the cake. 

The most important wealth secret you'll ever learn is understanding this relationship... and always starting with the cake first. 

Most investors get this backward. And they suffer as a result. 

Source: Early To Rise

Follow us on Twitter: @blacklioncm

One of the All-Time Great Investment Secrets

One of the All-Time Great Investment Secrets An Interview with Brian Hunt Wednesday, July 9, 2014

Today's DailyWealth covers one of the greatest investment secrets in the world. You won't hear about it in the mainstream media… and very few people want to publicize this idea… but it's one of the safest, easiest ways to make great investments. In the interview below, S&A Editor in Chief Brian Hunt reveals all the details behind this powerful investment secret… including the reason nobody wants to talk about it… Stansberry & Associates: You often say one of the great investment secrets – a source of giant investment returns – comes down to "investing in habits."  What's the story here? How can it lead people to great investments?  Brian Hunt: One of the truly great investment secrets is the idea of owning companies that sell habit-forming, or even addictive, products. I'm talking about things like soda, fast food, candy, cigarettes, and alcohol.  I often tell people that if they only knew this secret of investing, they could ignore just about everything else. It's that powerful.  Although it can lead to gigantic investment returns, it's not a popular idea. The Wall Street Journal isn't going to run a regular column about this idea. Mainstream magazines aren't going to run monthly features on it. Many folks are just not comfortable with owning businesses that sell habit-forming products. And if they are comfortable owning them, they are often very uneasy about publicizing it. It's not a popular topic at dinner parties or cocktail receptions.  S&A: Let's talk about some real life examples.  Hunt: Sure.  If you look at the list of the 20 best-performing S&P 500 stocks from 1957 through 2003 that kept their general corporate structure intact, you'll note many of them sold habit-forming products. It jumps right out at you.  For example, Phillip Morris is at the top of the list. It was the top-performing S&P 500 stock from 1957 to 2003. It sold cigarettes, which contain addictive nicotine.  Coca-Cola and Pepsi Co. are on the list. They sold soda… which is a sugar delivery vehicle. Hershey Foods and Tootsie Roll are on the list. They sold chocolate and sugar. Wrigley is on the list. It sold sugary gum, like Big Red and Juicy Fruit. People love to get a little sugar rush. It's habit forming… even addictive.  Many drug companies are on the list. These names include Abbott Labs, Bristol-Myers Squibb, Merck, Wyeth, Schering-Plough, and Pfizer. People get accustomed to taking certain drugs. Much of the time, those drugs are useful, although sometimes they are not. I'm not saying they are good or bad… I'm simply pointing out that people get extremely accustomed, even addicted, to taking them.  Fortune Brands, which was called American Brands for a while, is on the list. It sold cigarettes and alcohol.  You can make the case that certain fast foods are addictive as well. Food chemists load fast food with stuff that makes people want more. This is part of the reason McDonald's has been such a corporate success. McDonald's returned an average of 13% a year for three decades. Few businesses can achieve that kind of sustained performance.  The businesses I just mentioned produced more than 13% annual gains for decades. Those returns are extraordinarily rare in the stock market. You won't find anything better. Most companies can't sustain 13% annual returns for more than five years. The businesses I just mentioned sustained those returns for decades. And the reason why they did so well is simple.  When people form a habit around a product, it goes a long way toward ensuring repeat business. People get used to certain brands and they grow resistant to switching. Also, when people get used to a product and the brand surrounding it, they are more likely to continue buying the product even if the price increases a little. Both of these habits help companies sustain sales growth and healthy profit margins. That's good for shareholders.  It's also important to know that when these companies hit upon the right recipes or the right mix of whatever it takes to make good products, they don't have to make large, ongoing investments in the business. They don't have to spend tons of money on further research and development. Once Coca-Cola hit upon Coke, it didn't have to change it. The same goes for Budweiser and Hershey and Tootsie Roll.  When you develop a product that people love and develop habits around, you don't tinker with it. You don't have to spend a lot of money on new research and development. You don't have to buy expensive high-tech equipment. This means a larger percentage of revenues can be sent to shareholders. This leads to big dividends and share price gains. When a business get into that position, my friend Porter Stansberry says it is "capital efficient."  These sellers of branded, habit-forming consumer goods, by the way, are the kinds Warren Buffett, the greatest investor in history, always looks to buy.  S&A: How about a few recent examples of this idea working?  Hunt: The coffee chain Starbucks is a great one. It's one of the great success stories of American business.  Starbucks coffee was traditionally higher in caffeine than other brands. This helped it become more addictive. From 1995 to 2006, Starbucks advanced more than 2,000%. Starbucks was very good at selling a habit-forming product, and shareholders made a fortune.  Sam Adams is another good modern-day example. The makers of Sam Adams did a great job of producing quality beers associated with a strong brand. The name "Sam Adams" is associated with quality beer all over America.  From 2003 to 2013, shares in the maker of Sam Adams, Boston Beer, gained more than 1,000%. It's been a tremendous stock market winner. And the driver of those gains is a habit-forming product.  S&A: What are some of the other benefits of this strategy?  Hunt: The idea of owning businesses that sell simple, habit-forming products is great for folks who don't follow changing technologies.  It shows you don't have to try to pick winners from the complicated world of high-tech. You can make a fortune in "low tech" companies. It's very unlikely that enjoying a beer after work will become obsolete.  I like the predictability of owning robust, reliable businesses like McDonald's and Coca-Cola. I know it's very likely that folks will keep eating burgers and drinking soda.  I don't like the idea of buying a stock only to see it fall 30% in a few days because its fad product is going out of style… or because the cancer drug it bet the company on got rejected by government regulators.  Owning quality businesses that sell habit-forming products is a safe, sleep-at-night way to build wealth in common stocks.  S&A: How about another benefit?  Hunt: This strategy is also ideal for investing in high-growth emerging markets like China and India.  Combined, China and India have about 10 times the population of the United States. Many of those people are at the level of economic development of 1950s America… and they are getting a little richer every year. It's an incredible trend.  To invest in the trend, I don't want to try and guess what websites will become popular… or what retailer will become fashionable. That's a very difficult game. Those business landscapes will shift and change rapidly.  On the other hand, I'm very confident those folks in India and China who are getting a little richer every year will want to enjoy the same habit-forming products Americans have enjoyed for decades. They will want to consume more branded soda, cigarettes, beer, liquor, and processed foods. So, owning international businesses that serve those growing markets makes a lot of sense.  S&A: Can you provide some guidance on the right time to buy these companies?  Hunt: One way is to buy the biggest and best companies, like Coca-Cola or Hershey.  In order to buy them at a bargain price, it's best to buy them after a bear market or a major market correction. For example, many good sellers of habit-forming products fell 25%-50% during the 2008 market crash. After the crash was a great time to buy them.  You can also get bargain prices when a good company gets hit by what Warren Buffett calls a "one-time huge, but solvable, problem."  What Buffett means here is that even great companies make mistakes along their way to greatness. When these mistakes occur, investors often overreact and dump their shares. When you see a great company like Hershey or Coke suffer a major share-price selloff, I recommend viewing it as a potential buying opportunity.  Another option is to try and pick the next big success story. Who's the next Boston Beer or Starbucks? If you can get in early, the gains can be extraordinary.  But remember, that's a much riskier path. When Boston Beer began nationwide distribution, there was no guarantee enough Americans – accustomed to mass-produced lager like Miller Lite – would pay premium prices for a higher-quality "craft" brew.  And remember in 1997, a year after it went public at $30 a share, Boston Beer was trading for $9 a share. Probably not a lot of shareholders held on through the darkest days to enjoy the big gains.  If you want to try to profit from the next big success story, my advice is to keep your position sizes small so you can withstand the big swings in share price. Also, if your stock doesn't become the next big success story, at least you won't lose much.  S&A: Any final thoughts?  Hunt: It's worth addressing something that always comes up when this idea is discussed. People like to talk about whether it's right or wrong.  I'm not making a statement on whether owning these companies is right or wrong or socially responsible. Deciding to own businesses like these is up to the individual.  I'm just pointing out what works. I'm pointing out that selling habit-forming products often makes for a great business. It has been a proven strategy for decades… and it will continue to be for decades more. Human nature is what it is.  There are two basic keys to successful long-term investing in common stocks. One is to learn how to identify great businesses that you can own for years and years. The other is to make sure you pay good prices for your ownership stakes in those businesses. Knowing the powerful secret of "investing in habits" is a great help with the first part of the strategy.  If investors know this secret, they can make sure to monitor these types of stocks, look to buy them at good prices, and hold them for long periods of time. It's a proven wealth-generating idea that's rooted in common sense.  S&A: Thanks for your time.  Hunt: My pleasure. Source: Daily Wealth Follow us on Twitter: @blacklioncm