3 fundamental rules investors need to remember in 2017

We’re still a little way away from the end of 2016 but now is as good a time as any to assess your portfolio.

When reviewing your companies, we need to remember that the investors that have been able to amass vast fortunes have generally done so by following a strict set of investment rules, refined over many years of learnt lessons. Warren Buffett has his rules, Peter Lynch has others, and the Motley Fool team has its set of rules for recommending a top stock pick.

The following three qualities of a successful company are generally used by investors when deciding whether to invest in a company:

1)              The company must be resilient

Many companies were forced into bankruptcy or have never really recovered from the GFC. The best companies therefore, are those that have successfully negotiated the hard times and come out on top.

Consider Ramsay Health Care Limited (ASX: RHC), which has demonstrated a consistent ability to overcome almost any hurdle while continuing to deliver exceptional shareholder value over time. We need only look at the share price graph since 2000 to see how tiny the impact of the GFC was on the company’s overall performance.

The opposite is true of National Australia Bank Ltd (ASX: NAB). Its earnings per share are still below the 2008 high of 260 cents per share, while dividends have only recently overtaken the pre-GFC high.

2)              The company should produce plenty of free cashflow

If a company isn’t producing free cashflow- i.e. its outgoings are higher than incomings, then it is potentially on a slippery slope towards too much debt or having to reduce dividends. Great companies like CSL Limited (ASX: CSL) and Domino’s Pizza Enterprises Ltd. (ASX: DMP) produce plenty of free cashflow that can be used to invest in growth opportunities or increase payouts to shareholders.

3)              The company’s debt level should be manageable

Despite what drunk uncle Bob may have told you over Christmas lunch, some debt can be healthy for both an individual and a company. Taking on debt can allow a company to expand in order to grow earnings or to fund certain purchases to benefit the business.

Investors should be careful to only invest in companies that have a strong history of implementing acquisitions successfully. An example of this is Amcor Limited (ASX: AMC), which has a terrific history of consistent returns to shareholders while expanding.

3 Blue Chip Shares that follow these rules:

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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