When there are more buyers than sellers this results in there being more fuel in the tank of positive investor sentiment. For this to happen, a preponderance of investors must believe, at the macro level, that many, if not most, of the possible international and domestic problems previously described have been, or are being, resolved by the passage of time, or possibly from government actions.
This being the happiest of cases, attention then turns to how best to invest in companies with stocks trading in public markets?
For those choosing to self-manage their investments, rather than taking advantage of the services of professional investment managers through investments in mutual funds or ETFs, I believe that the relative growth of corporate revenues, rather than other market measurements, is the single best metric to use when selecting stocks to create a securities portfolio. Of course, professional investors will study many aspects of company progress, not just revenues. Nevertheless, revenue growth is a critically important measure of customer satisfaction and company marketing skills.
Revenue growth is directly impacted by the relative attraction of the company’s products and services to their customers, when compared to similar products and services offered by the company’s competitors. Therefore, if revenues are the factor being most closely studied, an understanding of the comparative benefits of the company’s products is also necessary.
As revenue royalties are not currently offered by publicly traded companies, investors are not able to own a percentage of the revenues and must consider owning the shares of the company generating the revenues. That being the case, investors should be aware of the economic outlook for customers of the company being evaluated. The relative growth of revenues for competing companies is also an available factor which should be considered.
The reason I favor, when possible, owning a percentage of a company’s defined revenues is that there is a direct and possibly immediate benefit, rather than having to wait for the company to declare dividends, repurchase shares, be acquired or be invested in by other investors. It is the future investment by other investors which will create a market rise in the price of the stock, and revenue growth of the company is likely to be one of the factors encouraging the purchase of that company’s shares.
Dramatic revenue growth is more likely to occur in earlier-stage companies, some of which may even be pre-revenue, and therefore pose greater risks to investors than established companies. Therefore, a diversified portfolio of well-structured revenue royalties is better for most investors than attempting to speculate in a single company as an investment. However, in some cases speculators have achieved remarkable success, although startup speculation has not generally been profitable for investors.
Even though equity markets are cyclical, the combination of service and technological development, resulting in customer benefit, can produce great profit for investors, as significant growth of revenues are created.
Arthur Lipper, Chairman arthurlipper@gmial.com
British Far East Holdings Ltd.