In investing, we are all looking for that rare gem, that company that will enrich us for the next 10, 20 or 30 years. We would like to know what the characteristics are, the common points of companies which have been stock market successes in the past to find young shoots that resemble them.

The problem, in my opinion, is that there are no definitive patterns. Each stock market success is unique, and it is unlikely to be repeated.

Instead of looking for what works, I find it probably makes more sense to figure out what doesn’t work, like Charlie Munger, who always looks for solutions by “reversing”, approaching a problem through the back door.

So, what would be the characteristics of a business whose chances of success are very slim, or even non-existent in the long term?

  • It operates in an industry in long-term decline.
  • Its products or services are constantly changing. The company must constantly reinvent itself.
  • Its business model requires a lot of capital, substantial investments, year after year.
  • Demand for its products or services is unpredictable and subject to big fluctuations.
  • The company has no power to dictate the price of its products or services. They are commodities that can easily be substituted.
  • Barriers to entry into its industry are low.
  • The company is dependent on several volatile economic factors over which its management has no control. Exchange rates, economic growth, interest rates, etc.
  • Its managers are handsomely paid, but own no or very few shares.
  • The company is very indebted.
  • The company depends on a few large customers for a substantial part of its revenues.
  • The continuation of its activities relies on its ability to raise capital regularly, through the issuance of debt or shares.

By eliminating companies whose characteristics correspond to these, we avoid a lot of headaches, in my opinion. And we significantly increase our chances of coming across big stock market winners in the long term.