What Companies Should You Invest In?
What type of companies should you invest in? The answer is simple: "good" businesses.
Think about this for a moment when you purchase anything, be it clothing, smartphones, TVs, furniture, cars, or a home you strive to purchase the best. You are probably not going out of your way to purchase mediocre products. The same is true for stocks, don't purchase mediocre investments, focus on good companies to buy.
Glenn Greenberg a famous value investor defines "good" businesses as:
"They [Glenn Greenberg and his team] want to buy "good" businesses, by which they mean those that are unchallenged by new entrants, have growing earnings, and are not vulnerable to being technologically undermined, and can generate enough free cash flow on a regular basis to make the shareholders happy, either through dividends, share repurchase, or intelligent reinvestment."*
Basically avoid "bad" or mediocre companies, they do nothing but increase your risk and lower your returns. Focus on buying quality business when they are undervalued and you will do very well for yourself.
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*p. 241, Value Investing From Graham to Buffett and Beyond, by Bruce Greenwald