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Feature Article: What Makes a Great Company?
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Behind all the financial numbers is a poorly understood concept. What makes a Great Company? If you understand the investing philosophy of Warren Buffet, one of the centerpieces of his investment selection process is to buy great companies.

A great company has such a strong business model, brand recognition and control of its marketplace that customers become the best advertisers for the company and competitors have to change their entire business models just to compete. Great companies make great long-term investments. To better understand what is a great company, consider the following example.

Harley Davidson (HDI). I can think of no better example of a great business than Harley Davidson. With limited advertising, Harley continues to sell motorcycles faster than they can make them. Owning a Harley Davidson motorcycle is virtually synonymous with being cool, and Harley owners are incredibly loyal. Harley customers will consistently pay top dollars just for the bragging rights that come with owning a Harley. Harley's competitors have had to start making Harley copies or risk losing a lot of business. When you say Harley, without saying anything else, everyone knows what you mean. How has Harley's stock held up? During the recent market downturn, Harley stock is actually up for the year; and over the past decade, Harley investors have watched their investment dollars quintuple.

    (1) The company focuses on quality. Even during difficult economic times, customers consistently pay more for something that they know is better.

    (2) The company focuses on its customers. Without customers, nothing else really matters. However, few companies really understand their customers and continue to deliver what their customers want. In the 1980s, Wal-Mart recognized that customers might want to buy their products wholesale even if they had to pay a yearly fee. Enter the highly successful Sam's Club. In the early 1990s, Microsoft recognized that most computer customers wanted all their electronic office products in one compatible package. Microsoft Office rapidly became a huge software product for Microsoft.

    (3) The company sticks to what it does best. Peter Lynch has a name for businesses that over diversify: he calls it diworsification. Harley Davidson does not try to design websites. Many great businesses have lost their way by buying or starting companies outside their area of expertise. Look at how many great companies blew millions of dollars on Internet companies that are now non-existent.

     (4) The company is not afraid to innovate within its area of expertise. Businesses that do not innovate often do not survive. Wal-Mart starts Sam's Club. Harley Davidson introduces the V-Twin. Coca Cola comes out with Cherry Coke. Even seemingly small innovations within a company's area of expertise can make a large difference to the bottom line.

     (5) The company continues to invest profits into the business. Great companies have a long-term focus and continue to recognize that a dollar invested today can yield untold benefits in the future.

     (6) The company focuses on its investors. A great company can do both: balance investor and customer needs. Without capital a business cannot grow, without customers a company cannot succeed. Unlike bonds, investor capital is often a very cheap way to acquire money to grow a business. Companies that please their investors often have a very cheap source of capital.

     (7) The company focuses on its employees. This is where businesses usually succeed or fail. Ultimately, if your employees are happy and allowed to share the wealth, everyone (customers, employees and investors) will benefit.

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Industry Profile: Health Care
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Since I have already profiled several great companies, this month I decided to profile an industry: Health Care. Over the next 20 years, 75 million Americans will enter their 60's and 70's. Current estimates (based on typical health care expenses for the elderly) indicate that these same 75 million people will spend over 30 percent of their yearly income on health care-related expenses from age 60 on. This equates to more than 1 trillion dollars per year spent on health care. In my opinion, this means that sometime over the next 20 years, the health care industry will undergo an explosion that will eclipse the technology explosion of the 1990s.

Recognizing an opportunity, I have already started investing in health care companies in anticipation of the coming health care boom. In back issues of the *Rogue Investing Report*, I have indicated that generic drug makers look like great long-term investments. If you are looking for an industry poised to grow rapidly over the next several decades, do not ignore the health care industry.

In 1960, Congress passed the Real Estate Investment Trust Act and REITs were born. Although on paper REITs could be called real estate mutual funds, REITs have some interesting characteristics that most other investments do not have. First, REITs are exempt from taxes as long as they pay out 95 percent of their earnings to investors. Second, REITs must have at least 100 owners and not less than five owners can own the majority of the shares. Third, REITs cannot speculate in real estate for the purpose of making a short-term gain.

These factors cause REITs to pay very generous dividends (remember they have to pay out 95 percent of their earnings to shareholders to keep their tax exempt status), and insiders usually have substantial ownership in the company since the only way for them to share in the profits is to be owners and also receive dividends. Many REITs have a 6 to 8 percent dividend yield.

REITs are typically divided into the type of real estate they invest in. For example, there are hotel REITs, shopping mall REITs, office building REITs and apartment REITs. REITs can be purchased just like stocks over all the major stock exchanges. Over the long haul, REITs have done very well. Since 1960, REITs have returned almost 15 percent per year with 50 percent less risk than the stock market. 

Next month's question: Are government foreclosures a good investment?

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Disclaimer: There are no guarantees in investing. I make no assurances regarding the investment information presented in the Rogue Investing Report.

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