My philosophy is rather straight forward in theory if not in practice.  The right companies are companies that can achieve market dominance and secure that dominance for a product or service that the market demands.  That is simplicity itself but amazingly it eliminates so many companies from the universe of companies to even consider that it makes analyzing what is left a much less daunting task.

A further narrowing of investments to consider occurs by looking for high returns.  High returns are typically afforded to companies that can pass further criteria and execute a good business model according to plan.  For example: Can a company grow to the available market without its expenses skyrocketing?  Are there sufficient barriers of entry to maintain profitable return?  Can the company achieve sustained earnings and a chain reaction to growth?

I want to own a company who owns a market by expertise, operational savvy, and foresight.  Because of that I place a strong emphasis on the company’s unique capabilities to meet a market need and being in a position to be uniquely qualified to best meet that need.

Now many excellent companies do not fit those additional criteria for the potential to achieve dominance through expertise and foresight with a high growth potential.  In many cases the simple lack of barriers to entry turn a good long term investment into a crowed field of profit margin destroyers.  Increasingly, many that do meet these criteria, especially in technology, have something in common.  These companies tend to leverage a strong portfolio of intellectual property (patents) or proprietary development, and possess a barrier to entry that is quite simply a means to distinguish itself uniquely in a market that requires their products.  The other thing that they have in common is the market itself they are addressing is poised for rapid or sustained, accelerating growth.

The strong property savvy have had a rather distinguished history of wealth creation.  Whether it was Edison, IBM, Bell, Microsoft or MGM, ownership of the proprietary rights to their foresights created household names out of many business ventures, inventors and companies.  Sometimes foresight even creates markets or eliminates old ones.  As part of my market research, I research patents.  Without boring you with magic sauce of that research, I try to figure out what the industries regards as the most powerful and threatening patents to fundamentally disrupt the business landscape. That puts me on the right path of actual marketable patent strength.  These patents tend to be piggy backed by the fearful competitors and highly referenced in the patent office by inventors other than the original inventor.  Quite simply, they already are recognized as a threat based on expertise and foresight. If these companies are in a market for growth they are prime candidates for some further analysis.

I discussed utilizing this method on the message board for free a year ago.  The consensus that came from just a cursory look at semiconductors gave two picks. Rambus which is up considerably in 2003 and another company discussed that is up 200% from that discussion date.  This other company is profiled in the portfolio of companies and is up 500% over a five year period as well compared to a slight negative in the NASDAQ over the same period.  While companies in their business have melted down all around them, the dominance this company has in intellectual property in a growing market has given them recurring licensing revenues despite  the turmoil in technology and the fierce competition of the warring product makers.

Next I consider is this company demonstrating the ability to recognize or execute on their potential dominance?  Do their competitors need what they have?  Are they already licensing what they have?  But before I would limit any selection of investments by such rigid criteria I evaluate again the universe of companies that can already dominate a growing market given other criteria or barriers to entry.   If they meet that bill through their own expertise and position they have already net the “ends” of the “means” tests and deserve strong consideration.

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