Common Sense Investing Part 3: Rule 2 for Successful Investing.

Rule 2: The business must produce a good quality non Durable Product or Service.

Rapidity of Turnover Refers to the number of times the stock of goods is sold and restocked during a given period of time. Turnover has a great influence on the companies consistent profitability.

To understand this let us consider examples of Coca Cola and LG

In case of coca cola, while buying coca cola people look for good quality and good taste and people won’t look for durability of coca cola, if a bottle of coke is consumed then the same person will buy one more irrespective of how long it lasts, here the rapidity of the turnover will be very high and this will lead to consistent growth in sales  over time. As a result, growth in earnings and stock price will also be consistent.

 

Considering LG, LG manufactures electronics. While buying electronics people look for good quality and durability, therefore as an electronic brand if the company wants the customer to come back then it has to produce a product which lasts long. Since Durability plays a major role, the rapidity of the turnover for companies the company from a customer will be very less. In this case the sales generally will be inconsistent and fails to follow a trend over a period of time. As a result, it is hard to find these stocks grow consistently as the earnings of these companies aren’t consistent.

Share Price Of Coca Cola

Share Price Of LG

Covering it in a nut shell, for businesses the rapidity of turnover is very important and companies offering durable products generally will have lesser rapidity of turnover and companies producing goods with faster turnover will have higher rapidity of turnover. Faster turnover helps in consistent growth in the profits as well as consistency in the stock price growth.

Video Explanation