All good companies make for solid investments. That has to be right, doesn't it?
After all, Warren Buffett only focuses on acquiring good businesses, and he's arguably the greatest investor this world has ever seen.
So it seems reasonable to assume that good companies have to make for good investments.
Or do they?
Buffett has indeed made his fortune on the stock market over the last six decades or so by buying quality companies.
But there's a catch…
This method has only proven to be ultra-successful because he is so good at acquiring the businesses when they are trading at discounts to their intrinsic value.
Over the years, that has included companies like Gillette, IBM, The Coca-Cola Company and American Express.
All of these businesses boast strong and sustainable competitive advantages, or "moats" as Buffett refers to them. And they were all trading at compelling prices when Buffett made his move.
As a result, he has managed to smash the market's returns in most years, and looks set to continue doing so well into the future.
Of course, that is the ultimate aim of investors in the sharemarket – to beat the market's gains over the long run.
I'll show you how you can do that in just a moment.
But first, I want to reiterate that this can only be achieved by paying the right price.
It doesn't matter how good a business is – if its shares are not reasonably priced, the returns are highly unlikely to be spectacular in the long run.
Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are two perfect examples. In fact, they could well be the most overpriced stocks trading on the ASX right now.
Investors seem to think they can continue growing earnings strongly in the coming years, but that could become difficult when interest rates rise.
Woolworths Limited (ASX: WOW) is another quality business, but considering its sheer size, its growth prospects are more limited. I would be waiting for the shares to drop in price before hitting the "buy" button.
These are three of Australia's most popular and widely-held stocks, and yet they do not present as good buys today!
Already I can hear an army of Aussie investors gathering to protest that I'm wrong. After all, they each offer decent yields and would all survive through even the toughest economic conditions.
And who could forget the incredible returns they have delivered investors over the last few years….
That might all be true, but it's the future that really counts.
Sure, the businesses will still grow over the coming years, although it is likely to be at a more modest pace. And at their current prices, it seems highly unlikely they can beat the market's returns over the coming years.
But the good news is, there are other stocks that can. And that's what I wanted to show you.
That's right, even with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) sitting near a multi-year high, there are still stocks which look compelling.
For instance, Yellow Brick Road Holdings Ltd (ASX: YBR), Cash Converters International Ltd (ASX: CCV) and M2 Group Ltd (ASX: MTU) are all solid bets. And at their current prices, they stand a very good chance at beating the market's returns in the long-run.
While I currently own Yellow Brick Road and Cash Converters, M2 Group remains firmly on my watchlist and could well be my next big buy.
