How to Pick the Best Companies to Invest in (7 Traits to Look For)

People are always talking about the benefits of investing in the stock market.  The thrill of picking the next Amazon and becoming an "overnight" millionaire.  But no one tells you how to choose the best companies to invest in.  

And well, sadly, becoming an overnight millionaire is highly unlikely.  You could easily lose your entire savings investing in the stock market.  So it is important you learn how to invest in strong, solid companies that can survive even bear markets.

Good thing for you.  Excellence leaves clues.  And with there being so many studies on what makes a great company, we have lots of clues to follow.  After all, the good ones tend to have a few things in common.

Today, we'll focus on 7 main characteristics you should look for when deciding which company to invest in.  These common traits exist in good companies that have solid track records, will stand the test of time, and are probably being sold for less than they are worth.

One thing to remember is that picking great companies is never as easy as picking the most talked about company or the company that gives the best dividends.

To really pick a company that will last you'll have to do a little more research.

How to Pick Great Companies to Invest in

If you want to pick great companies to invest in, there are a few traits you should look out for.  And, by a few, I mean 7.  

So what are these traits?  Well, we are about the find out.

Trait #1 - Institutions Don't Own It

One of the very first things you will want to check when looking into what company to invest in is whether or not it has institutional ownership.  

While institutional ownership does has its plusses, there can be great disadvantages to investing in companies in which a significant portion is owned by institutions.

That is because any changes made be those institutions could cause big changes in the value of the company's stock.  For instance, should the company experience some bad press or hit a wall in earnings growth, those institutions will most likely sell their stocks.

The resulting huge sell off would cause the value of the company's stock to plummet and your stock right along with it.

So always check who owns the company's stock.  And if there are too many institutions, you may want to consider running for the hills.

Trait # 2 - The Company has a Niche

Niche has been the buzz word in business for probably well over a decade at this point but it is still relevant in the market today.  

Companies with a niche have specific products and consumers that they are catering to.  This makes it easier for them to target the specific groups who would be most likely to purchase their products.

When you know exactly who to talk to and how to talk to them, you can build a strong community of super fans around your product and company.  Subsequently, sales can grow exponentially.  So it is easy to see how these companies in niche markets prosper.

Just remember, niches are where the money's at.

Trait #3 - Has an Evergreen Product Line

The best kinds of companies to invest in are the companies that are going to stick around for a long time.  I mean, it may go without saying, but you don't want to invest in a company that is going to go belly up in a few years.  You want one that is going to be around for the long haul.

That means, you are going to want a company that has products that people not only use but will always use.  Things such as toilet tissue and food are products that you can be sure people will always purchase.  So companies that sell them are always going to be in demand.  And, consequently, so will your stock.

Trait #4 - Makes Good Use of Technology

If a company does not use technology, they are probably already extinct.  And if they do not know how to use technology effectively, rest assured that they are going extinct.  Because in this day and age, technology is everything.

Companies that are able to use technology to stay relevant and to give them an edge over their competitors are in it to win it.  And it is those kinds of companies that will usually outperform all of the rest.

So keep your eyes and ears peeled for those companies that use the latest technology and know how to use it wisely.

Trait #5 - Company Insider's are Buying the Stock

If no one is buying a company's stock, there may or may not be a problem.  But if the people who work for the company are not even buying the stock, there is definitely a problem.

A company's employees and execs are in on the ground floor and privy to all of the company's latest initiatives and future plans.  They will know before anyone else when a company is about to make a big move.  So watching them closely could give you a good indication as to whether a company is a good one to invest in.

When the insider's are buying, maybe you should be too.  There's a good possibility that something big is in the offing.  Otherwise, the insiders wouldn't be buying.

Trait #6 - The Company is Boring

No one likes a boring company but, quite frankly, that's what makes them great. Companies that are flashy, exciting, or on top of the latest trends are more likely than not one hit wonders.  They are probably all talk with no game to back it up.  

But these are the companies who most likely will make the headlines because they are exciting and people want to talk about them.  So, that company's stock may rise for a while but eventually when all the hoopla has died down, they (and you) may find that they do not have a leg to stand on.

This could be the case of companies that grow too fast and haven't acquired the resources to sustain that growth.  Or companies that have one excellent product but fail to come out with another one.

In contrast, those companies that don't make the headlines.  The ones with nice, steady growth and a strong consumer base.  

You know.  The boring ones.

Those are the ones that go unnoticed.  But they are also the ones that will take could care of the money you invest.  So while everyone else is running after those Teslas, Amazons, and Google equivalents, you will out there getting the cream of the crop before they are even on anyone else's radar.

Trait #7 - Companies With Bad Press

This may seem like a strange trait to go after but if you've are into value investing, this is just what the doctor ordered.  Because as a value investor, you want to buy companies that are undervalued.  And what better way is there to drive down the price of a company's stock than bad press?

After all, bad press doesn't necessarily mean bad company.  At least, not always. Sometimes good companies hit a few bumps every now and then and you will want to buy in when they do.  

Of course, don't just go invest in a company because there are negative rumors running around.  First, you want to make sure you understand what those rumors are about and if it is true.  And you'll also want to make sure the company has good strong financials before you buy in.

All in All

Picking the best companies to invest in is tricky because when it comes down to it, everyone is different.  The companies you invest in should be what is best for you and your financial goals.

Just as it would not be wise for you to put all your money into the stock market if you are looking for safe returns.  It is also not a good idea to invest in a growth company when your goal is cash flow.

So while the strategies above are great for picking solid companies with good prospects, you'll have to dig a little deeper to make sure they align with the plans you have for your financial future.

Happy Investing!