The graph below is called a histogram. In this case, it shows the number of companies in each category. The graph goes from left (decent companies) to right (amazing companies). In total, we have 68 companies, categorised as follows:

• Decent = 19

• Above average = 11

• Good = 13

• Very good = 7

• Extremely good = 8

• Great = 4

• Amazing = 6

No company that went into making this graph is below average, all are worthy of investment consideration. Some of the biggest names in the world actually fall into our lowest category (decent), such as Coca-Cola and Pepsico.

An observation to remember is that more companies are closer to decent than they are to amazing. That is to be expected, we know that amazing companies are rare and we also know that competition in business tends to bring down the amazing over time.

So what is this graph all about? This is an analysis of our watchlist. As we analyse companies, we add them to the list in the category where we think they belong. The list is a snapshot of what we think right now. Over time, the companies will move up and down as their fortunes rise and fall. The list is dynamic.

You might be thinking, that makes investing quite simple, just buy the great and amazing companies and you’re done. If only investing were so simple! Let me illustrate what I mean.

We own only two companies in the amazing category – Nvidia and Broadcom. We own only one company in the great category – KLA Corporation. Everything else we own falls much lower on the list and most of the companies we are currently interested in, are in the lower categories.

Good investment vs. good company

This brings us to the core concept of this newsletter - the difference between a good investment and a good company. Believe it or not, they are not the same thing.

A good company is one that has superb financial performance. A good investment is a company that can rise in value over time and deliver to you an adequate rate of return.

Getting a good rate of return does not require you to own a good company. In fact, you can even get it out of a bad company. (This is not our Extraordinary Investing way, but it is possible).

In a sense, this is what value investors do. They buy cheap companies that can rise in value. Almost by definition, the company cannot be a great company or it would be too expensive to buy in the first place.

How to evaluate an investment

When you are considering an investment, you have to look at three things:

1. Historical performance (Past) – to get an idea of the company’s financial strength.

2. A view of the company’s prospects (Future) – to understand whether it’s business can prosper in future.

3. Valuation (present) – to understand how much of the future financial performance you are paying for today.

The reasons why we have not gone out and bought the best companies on our list comes from point 2 and 3. The better a company is the, more highly priced it is. When you compare its price to your view of its prospects, sometimes you find that the company can only ever deliver average returns.

There is a lot of this going around at the moment, particularly in the US markets. Some of the most brilliant companies are priced for perfection. They would have to deliver record financial performance for years to come to justify their price. That makes them risky or low return potential investments.

For those reasons, one has to look at companies elsewhere on the list, which have good prospects and good valuations. These companies can make better investments over time than overvalued amazing companies.

Ten companies for your watchlist

It’s always nice to start your investment homework with names someone else has pre-checked. So here are ten companies from our watchlist that you may not have heard of:

1. Medpace (MEDP) - provides drug and medical device development services.

2. Lululemon Athletica (LULU) - designs and distributes athletic apparel.

3. Marriot International (MAR) - operates, franchises and licences hotels and lodging worldwide.

4. Idexx Laboratories (IDXX) - develops, manufactures and distributes products for animal vetrinary markets.

5. Eli Lilly (LLY) - discovers, develops and markets pharmaceuticals.

6. Old Dominion Freight Line (ODFL) - operates as freight shipping company in North America.

7. Booking Holdings (BKNG) - online travel and restaurant reservations.

8. Zoetis (ZTS) - discovery, development and manufacture of animal medicines.

9. Dominos Pizza (DPZ) - international pizza company.

10. Mettler Toledo (MTD) - manufactures and supplies precision instruments.

Note: these are not investment recommendations. They are merely good names to start your investment homework with.

Conclusion

Let’s wrap this edition up with a step-by-step guide on how to invest, while balancing good companies with good returns.

1. Make a small list of good companies (like those mentioned above).

2. Do your investment research and evaluate the prospects and valuation of each company. (You can use a simple formula to value a company, as we discussed here).

3. Buy the company that gives you the best return potential.

I would like to hear what you’re up to.

DM me on social media or email me.