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If there’s one thing that you can guarantee about the stock market, it’s that nothing can be guaranteed and the theme of completely safe companies is unrealistic.
This might sound like scaremongering, but do you think that those with a long position on Boeing – fresh from the aviation firm’s stock hitting all-time highs at the tail end of 2019 – could foresee the coronavirus pandemic wiping some 200% off its value in the blink of an eye?
Older readers will remember Enron, an energies giant that – on paper, at least – looked to be the safest of investments. However, when a series of accounting ‘irregularities’ were revealed, the company was on the fast train to bankruptcy and liquidation. Traders who didn’t move fast suffered catastrophic consequences.
Clearly, the key to success in stock trading is to eliminate as much risk as possible. You can’t eliminate all risks because nobody knows what’s around the corner – 2020 taught us that much.
If you are completely new to stock trading, you really should check the best shares to start with. Get a feel for the markets first and invest in safe companies where the daily gain/loss is a small percentage – particularly disheartening for new traders is seeing red numbers on consecutive days.
However, with safe stocks, you know – or at least have high hopes – that one day, they will regain ground and push on to new highs. Here’s how you can identify safe companies.
How to identify safe companies
Profits come what may
Remember, the stock price is inextricably linked to the performance of a business. If you want to hold long positions for future profits, you need to find safe companies that can handle anything.
The irony of the coronavirus pandemic is that it has been devastating for many industries and individual businesses, and yet some major players have kicked on. Amazon, Netflix, Microsoft – all have thrived because they have offered products and services that people want and need, viral outbreaks or otherwise.
There are safe companies out there that will thrive regardless of the economic or political situation, and those may not be the most exciting investments but should offer annual returns that match or beat the interest on your savings.
A business model that cannot be matched
When you look at firms such as Amazon and Netflix, it’s interesting to think that what they do isn’t particularly unique or earth-shattering in 2021, and yet they still enjoy huge competitive advantages.
Why? Because they simply do things better than their competitors.
Amazon’s success has come about because it has the logistics and supply chain to get pretty much anything to anyone within a couple of days. It helps that its brand name is now basically a verb – “I’ll Amazon it”, you might say when you need to buy something, and this is an unbeatable advantage. Will there ever be a global online retailer that can match Amazon?
Netflix outmaneuvers other streaming services because it had a first-mover advantage and acquired the licensing for lots of big-name movies, sitcoms, and drama series, and also because it started producing its own exclusive content before any other competitor. Is Netflix the best streaming service? That’s up to you to decide. However, it is certainly the biggest and is likely to be so in years to come – this is all that really matters to traders.
Also, don’t forget to consider investing in safe companies with an offering that is completely unique to them. One of the safe companies is Walt Disney, for example, has theme parks and attractions that cannot be replicated. It has characters that are timeless and perennially popular. It now has exclusive rights to all of its movies and animation series, ensuring the success of its own streaming services.
The Disney decision-makers may make missteps with their external investments from time to time, but at its core, its ‘product’ cannot be matched – those firms are some of the safest investments around.
If you can’t beat them, join them
Of course, you don’t need to take the risk of investing in unsafe companies in businesses per se when you can actually acquire stock in specialist investment firms.
Berkshire Hathaway, for example, is a holding company that owns numerous subsidiaries around the world. However, as importantly, it has its own stock portfolio, with one of the sharpest minds in investing – Warren Buffett – deciding when to buy and sell. Why not let Berkshire Hathaway make your trading decisions for you by investing in its stock?
From a different perspective, you can invest in stocks such as Vanguard. Like Berkshire Hathaway, it has a stock investments division, but it is also closely linked to real estate – if you believe that property prices are going to continue to rise, piggybacking on its trading could serve you well.
The reality is that no investment is completely safe – that’s just the nature of the beast. However, if you invest cautiously and wisely, you can still make the kind of numbers you want to.