I'm a big follower of music, not only for enjoyment -- but
also because I believe it's an industry that teaches a lot about
the importance of mass appeal in investing.
There's a story I read recently about an aspiring star who
sits down with a top music producer -- the producer immediately
pulls out a series of flash cards -- and asks the would-be artist
to look through them.
Doing so, the young man finds black-and-white silhouettes of
well-known rap stars, which the producer immediately began to
quiz him on: "Who's that? Who's this?"
The upstart names each one, easily. Identifying exactly who
the artists are, even without faces -- by zeroing in on telltale
features like a trademark hat, a signature necklace or a unique
At which point the producer leans in and says, "Exactly. How
are people going to recognize you?"
His point was this: To be appealing and memorable, a brand
needs to hold certain qualities and be easy to define.
The same is true of great businesses.
The most successful businesses in the world -- and usually
some of the best investments -- have brands that are easy to
define and possess just a handful of key qualities.
Just think of how many successful companies can be summed up
in a few words.
) is known for "low prices." Apple (Nasdaq:
) is "innovative and cool." Berkshire Hathaway (NYSE:
) is "trusted."
All of these firms have also carved dominant niches that make
it clear to investors exactly what they can expect from these
businesses, and why they should be excited about them as
Firms that don't follow this mantra struggle.
I can't think of a better example than RadioShack (NYSE:
) -- a firm that's collapsing before the eyes of investors,
despite being a once-hallowed name across the United States.
The retail firm reported fourth-quarter and year-end earnings
earlier this month. And the results were ugly.
RadioShack's fourth-quarter loss widened to more than $190
million -- greater than triple the loss of $63 million the
company reported for the same period of 2012.
The stock plummeted 17% on the news. But what's more telling
is, as the chart below shows, RadioShack's investors have
suffered a near-complete wipeout over the past four years, with
the stock declining 90% since early 2010.
The future isn't looking any better. RadioShack announced it
will close up to 1,100 stores across the United States -- over
20% of its stores. All of this has analysts predicting bankruptcy
and the potential demise of the company.
RadioShack's lack of a defining "theme" shows how
to build a successful firm. In fact, it's the worst business I
can think of.
The takeways are especially apparent when we run the company
through the list of qualities I use to look for great businesses
in my premium newsletter,
Top 10 Stocks
. (We only buy what we consider to be some of the world's
Consider the following points:
The world's greatest businesses sell their products at
RadioShack has actually been trying this strategy -- attempting
to increase its margins to improve profits. The problem is that
consumers need a justification for paying premium prices. An
iPhone is more exciting than an LG Optimus. Coke (NYSE:
) is more loved than Mr. PiBB. There's something more special
about a diamond in a Tiffany (NYSE:
) box than a diamond from J.C. Penny (NYSE:
). RadioShack is... none of the above.
The world's greatest businesses sell products used in
RadioShack has been moving opposite to this rule -- looking to
sell more complex and obscure private-brand products. The less
simple your product becomes, the tougher your business execution
The world's greatest businesses have a global reach and
appeal for their product.
Anyone who's been to Tokyo's giant Akihabara electronics district
knows that RadioShack will never have global reach. Most
countries have their own retail electronics businesses -- many of
them extremely advanced. To be truly global, a business must
offer a completely new experience, unavailable in the homeland --
the way a firm like Starbucks (Nasdaq:
The world's greatest businesses have unlimited growth
It's hard to add new products or revenue streams to your business
when customers are increasingly avoiding your existing lines.
Once you lose consumer eyeballs, you've lost much of your ability
to move in new directions.
The world's greatest businesses have clear competitive
advantages that dominate their competition.
This one is a complete bust for RadioShack. Name any aspect of
retail and there's a competing firm that does it better.
RadioShack isn't the cheapest, hippest, or most wide-reaching.
It's struggling to catch up everywhere.
The world's greatest businesses generate enormous cash
flow with low capital spending requirements.
As mentioned, RadioShack has been trying to turn things around by
adding new products to its stores. But every new product means a
completely new purchase of inventory -- at significant expense.
This is even more risky when you're dealing with unproven new
products. RadioShack could end up with a lot of capital spending
and little in the way of sales.
The world's greatest businesses have extremely high
or at least margins that outpace its broader industry. This is
tough to do when you can't charge premium prices. RadioShack
lacks the scale of a competitor like Best Buy that would allow it
to drive down inventory and distribution costs in order to
To call RadioShack the world's worst business is somewhat of a
hyperbole. But there are an awful lot of cautionary points here
-- fatal flaws that all investors should be looking for as they
survey other businesses in the retail sector and beyond.
I believe this also reinforces one of the core beliefs of
Top 10 Stocks
-- that the world's best investments hold simple yet fundamental
things in common. These drivers of success come down to
philosophy rather than financials.
So far, we've seen excellent results over the past few years
by following this strategy. In fact, out of the 16 holdings in
our Top 10 Stocks portfolio, 14 have been profitable and more
than half are up over 22% since we recommended them. Some have
even gained 41%, 45% or even 59% in less than 3 years. (I talk
about a few of these market-dominating companies in my latest
research, which you can
Simply put, by looking for firms doing the "little things"
right, you can find investments that will generate value for
years to come -- and avoid those that destroy shareholder
. -- The only thing better than investing in high-quality
companies is investing in high-quality companies that return
money directly to shareholders. In my latest research, I've found
13 market-dominating companies that have been
hoarding billions in cash
since the financial crisis -- and they're set to pay out $39.5
billion in dividends in 2014 alone. And that's just the
beginning. To get access to the names and ticker symbols of some
of these companies, simply
view this special report