3 key secrets of every would-be share market winner

What should you look for when you want the biggest winners? Depending on who you ask, and what your investment goals are, you might get a multitude of answers combining something like price, moats, balance sheet, growth potential, competition, dividends, and so on.

All of these are relevant to a potential purchase in one way or another. However, I believe that any company that possesses the three following attributes has a better than average chance of great success:

A competitive advantage

If you can’t get an edge on the competition, you could find your sales quickly eroded away by competitors offering lower prices or better service. Offering a better product or service generally allows a company to achieve either greater scale, or better margins (or both), allowing for more spending on innovation and reinvestment.

Some businesses like Blackmores Limited (ASX: BKL) achieve a competitive advantage through branding, although Blackmores also faces competition from other branded businesses like Swisse. Woolworths Limited (ASX: WOW) has an impressive competitive position due to its store network, believe it or not, yet unfortunately this advantage is largely matched by competitor Wesfarmers Ltd (ASX: WES), while its margins are under threat from cut-price Aldi.

Multiple ways to win

One way to win can be good, but it leaves you vulnerable to being made irrelevant by innovative competitors. The best companies have several ways to win, like Retail Food Group Limited (ASX: RFG), which benefits both from the spreading of franchises, as well as franchisee success since Retail Food claims a percentage of all sales. Now with the addition of its coffee roasting and bakery capabilities, Retail Food Group also makes a profit on wholesale supply.

Having a competitive advantage in one area can allow a company to leverage its success to expand into parallel industries, increasing the number of ways to win (and its competitive advantage).

Ability to reinvest in itself

A company that has enough financing to reinvest in itself can position itself to really exploit its competitive advantages and multiple ways to win. CSL Limited (ASX: CSL) is perhaps the ultimate re-investor, with the company spending hundreds of millions every year developing valuable, high-demand products. With its unique products, innovation, acquisitions, buybacks, and strong financial position, CSL is one company that ticks each of these three boxes.

Another business that fits the criteria is a2 Milk Company Ltd (Australia) (ASX: A2M), with its milk products reportedly better for digestion than regular milk (competitive advantage), and plans for expanding its milk and baby formula sales into a number of countries including the US, UK, China, and Australia (multiple ways to win). a2 is just at the beginning of its journey and must build a genuine competitive advantage as well as improve its brand, production capacity, and distribution networks (reinvestment potential).

The biggest winners on the Foolish scorecards are - almost without exception - businesses that fit the above criteria. Several of them were recently selected by our analysts as their Top 3 blue chips picks for 2016 because these companies have sizeable competition advantages, pay fully franked dividends, AND offer the prospect of significant capital appreciation.

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Motley Fool contributor Sean O'Neill owns shares of A2 Milk and Retail Food Group Limited. The Motley Fool Australia owns shares of A2 Milk and Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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