Assume you have a fat bunch of money sitting in your bank account and you want that money to stop behaving like a lazy guest. You want it to work, grow, and hopefully return with more friends. So, naturally, you decide to buy stocks.
Maybe you reached this conclusion because you want to grow along with your nation. Maybe inflation has scared you enough by constantly reminding you that the buying power of your currency is slowly shrinking like a woollen sweater in hot water. Or maybe your office colleague made money in the market and now walks around like Warren Buffett’s distant cousin. Another possibility: you received an email explaining exactly why Nestle is now a bargain, and for some reason, it sounded very convincing at 11:45 p.m.
Whatever the reason, through one method or another, you buy stocks to make money.
But before buying any stock, it is important to understand how money has been made most successfully in the past. A casual glance at market history shows that two very different methods have been used to create fortunes.
These methods often involved betting on the business cycle.
In earlier times, when unstable banking systems caused repeated booms and busts, investors tried to buy stocks in bad times and sell them in good times. Buying during fear and selling during excitement had strong elements of value. Of course, doing the opposite had strong elements of financial comedy.
But is buying in bad times and selling in good times enough to create a fortune?
Never.
If you, or someone you know, believes that this alone is enough, then caution is required before the table turns and the fortune quietly succumbs to the financial laws of gravity.
What was additionally required was the ability to distinguish companies with competitive advantages from companies stuck in price-competitive sectors or industries. In simple words, not every beaten-down stock is a hidden gem. Some are just tired stones pretending to sparkle.
So, the question arises:
Are there opportunities today to make investments that, in the years ahead, will yield higher profit gains?
The answer requires a little more explanation.
One reason why the current time may be better for investment is the change that has occurred in the fundamental concept of corporate management and how companies handle their affairs.
A generation ago, the heads of large corporations were often members of the owning family. Many of them regarded the corporation almost like personal property. The company was not just a business; it was practically the family’s very large, very serious-looking drawing room.
But today, things are very different.
Modern businesses operate in a world of constant competition. Top management is usually engaged in continuous self-analysis and an endless search for improvement. Companies now consult experts, advisors, specialists, and sometimes probably even people whose job titles are longer than their actual advice. The goal is simple: find better ways of doing things.
Another important change, especially from the late twentieth century onwards, deserves attention. This is the growth of corporate research and development laboratories.
Research and development can become a powerful tool for opening up a golden harvest of growing profits for shareholders. New products, new materials, better processes, and improved technologies can create large opportunities for companies that use them wisely.
At the same time, the cost of research and development should not be underestimated.
R&D is expensive. Very expensive. If not handled wisely, it can have a crushing effect on corporate earnings because these costs add up under operating expenses. Companies may take up many research projects, but only a handful of them may finally produce profitable returns.
In many cases, it can take 7 to 11 years from the time a project is started until it has a meaningful impact on corporate earnings. That is a long wait. Even a patient investor may need tea, snacks, and emotional support.
But the cost of too little research can be even higher.
If industries fail to keep pace with changing times, they risk falling behind. In the coming years, with the introduction of new materials, new machinery, and better technologies, competition will grow steadily. This will eventually narrow the market for thousands of companies that fail to adapt.
So the lesson is simple.
The past gives us clues. Fortunes were not made merely by buying cheap stocks during bad times. They were made by identifying businesses that could survive, improve, innovate, and stay ahead of competition.
A smart investor should not only ask:
“Is this stock cheap?”
A smarter question is:
“Does this company have the strength to keep growing when the world changes?”
Because in the stock market, just like in life, standing still while everything else moves forward is not stability.
It is slow-motion trouble.
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