“Meme stock” mania is back again.
That’s the trend where investors – often younger ones, driven by comments in internet forums – buy damaged companies… sending their stocks soaring for no good reason.
Think GameStop (GME), which shot up 1,700% once upon a time – only to crash by 75%. Or AMC Entertainment (AMC), which went up 600%, but then lost 85% of it.
Some investors were able to cash out at the peaks… but most were left holding undesirable shares of a weak company.
The latest “meme stock” target is nationwide retailer Bed Bath & Beyond (BBBY). You might have heard about its recent share price growth in the news.
It hasn’t turned a profit in years – crushed under a mountain of debt and unfortunate decisions…
Yet it peaked at 600% above its summer lows last week.
That intense, fast-paced rise didn’t tempt me one bit, though. I happily sat on the sidelines, knowing it was based on pure speculation.
And I was right. Since then, it’s crashed more than 65%. Some of its suppliers are so worried about getting paid, they’ve even stopped giving the company merchandise to sell.
Unfortunately, millions of inexperienced investors don’t get the difference between speculating and investing. They buy into the fantasy of quick riches… which almost never works out.
At Intelligent Income Daily, we don’t play fast and loose like that. We focus on safe, consistent income that helps us sleep well at night.
My team and I use our decades of market experience and research to find the plays that are statistically proven to deliver the most reliable returns, year after year.
And we can do that through any market conditions. Take Realty Income (O), for example, my favorite stock. Over the past 10 years, it’s gained 185%. Plus, it pays me a dividend every month.
That kind of wealth-building strategy might not result in 600% gains overnight… But it does offer returns that actually last – with much less risk.
So how do you find the best plays amid all the noise in the mainstream?
Well, I named my publishing business “Wide Moat Research” for a reason.
Just like a moat that surrounds a medieval castle to protect those inside (the fortress), intelligent investors should always seek out investment opportunities that cannot be easily attacked.
So, what exactly is a moat when it comes to investing? And how do you find the companies that have wide moats?
Today, I’ll share examples of wide moats and qualities of what else makes a company long-lasting. If a company has these factors, we know it’s a strong player that can endure unstable markets… like the one we’re in today.
Recognizing a Real Moat and What Makes It That Way
Here are some big ways to know a business can be a keeper. I look for these factors every time I consider a new investment…
A competitive advantage: To be successful, a business must have a long-term competitive advantage. That is, something unique that separates one from another.
Without some type of competitive advantage, the business is simply not sustainable.
Consider how many smartphones are on the market today for example.
They pretty much do the same exact things. But many people (myself included) would rather buy an iPhone no matter the price.
Why? Well, they look pretty, they perform well, they’re easy to use… And they’ve become a bit of a status symbol.
As such, Apple (AAPL) can charge customers more money for its product. The tech giant has turned iPhone into a brand with competitive advantages over its rivals, giving it one version of a wide moat.
(In the coming days, I’ll share how I learned – the hard way – why it’s wise to seek companies with competitive advantages.)
Financial stability: Another way companies bring in reliable, growing income is lack of competition.
For instance, you probably don’t have much choice when it comes to who you pay for utilities. In many parts of the country, the law only allows one utility to provide service in an area.
That kind of exclusivity – or very wide moat – makes it very difficult to fail.
Moreover, it’s hard to live without electricity or running water. This gives utilities another leg up in that they have a pretty good idea about what they’ll earn each year.
Experienced management: The success of a business often depends on its leaders. They call the shots. And they impact everything from operations to employee attitudes.
Companies need executives who have a clear, realistic, and inspiring vision of where their businesses will be tomorrow… next year… and next decade.
This requires experience, connections, a can-do attitude, and an ever-present willingness to prepare for the future.
Continuously successful business leaders know how to fit growth plans into their budgets without breaking the bank – come rain or shine.
The best way of knowing whether these leaders fit the bill is talking to them directly. This is something I do often in my research phase. But you can find a lot on your own too by reading their interviews and communications.
Respect for shareholders: A company can have a great business but be a poor investment. This isn’t as conflicting as it may seem.
It might focus too much on growth.
Or executive compensation.
Or programs that benefit it more than its investors.
Personally, my favorite sign of shareholder respect is a healthy and growing dividend. Not only is that extra cash in my pocket to spend how I see fit…
It’s a great way of keeping companies accountable. They’re far less likely to spend money unwisely when they know some of it belongs to someone else.
Finding Businesses With Wide Moats Sets You Up for Success
Of course, not every quality business succeeds. There’s never such thing as a guarantee in the stock market.
But targeting companies that have the qualities above puts your portfolio in a statistically safer place.
A speculator might trade the stock of an unprofitable business – like Bed Bath & Beyond – hoping to make a quick buck.
But as an investor, I’d rather own shares in a high-quality, profitable, growing company that rewards me over time.
So, the next time you’re tempted to put money into the next hottest trend… Ask yourself if the company has a true moat – and other desirable qualities – before taking any action.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily