Common Sense Investing Part 2: Rule 1 for Successful Investing.

Rule 1: Business must produce product or service for which the demand must grow with time.

If one expects to hold the stock forever, then one wants the business to produce a product or offer a services for which the demand will be high and will continue to grow with time. If the business produces a product for which the demand grows along with time, then one can expect the business to report higher sales moving forward. Higher sales will generally turnout into higher profits and growth in profits will lead to higher stock prices.

Now let’s consider example of  Colgate and HP and try to analyse which among them is a better investment.

In this example we are quite aware that Colgate sells oral products whereas HP sells laptops and PC’s.

Considering Colgate, Colgate is selling toothpaste from 1873, The sales in year 1994 was 9 billion$ where as in 2015 the sales is 17 billion $. Colgate produces products for which the demand grows over time. 50 years from now one can expect Colgate to be selling more oral care products than what it is the selling today.

Now considering HP in 1995 HP generated a revenue of 30 billion $ where as in 2014 HP has managed to generate 111 billion dollars, 

Going by the numbers HP looks to be a better investment as the sales have managed to grow faster.

But 50 years later the future of HP is uncertain, the product that HP would be making 50 years from now is unknown, Hence Colgate looks to have a better prospect as even after 50 years one can expect Colgate to be selling oral care products.

HP might enter a better business which can make it grow much faster than Colgate, but what business HP will enter is uncertain, hence betting on something uncertain isn’t a good investment.

To put in a nut shell one must buy business that is expected to produce a product or provide service and demand for the product should increase along with time.

Video Explanation