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Core of the Story

It seems so intuitive that good companies with superior management should be better investments in the long term that investors often do not need much convincing when they are presented with the argument. Consider some reasons given for buying good companies:

  • History backs you up. If you look at a portfolio of companies that have done well in the stock market over long periods, you inevitably will find well-managed companies that have succeeded by offering needed products to their customers. Based upon this, some investors and investment advisors argue that you should put your money into companies with good products and management and that you will reap the rewards from this investment over long periods. Better management, you are told, will deliver higher earnings growth over time while finding new investment opportunities for their firms.

  • Well-managed companies are less risky. This is a secondary reason that is offered for buying well-managed companies. If one of the risks you face when investing in companies is that managers may make poor or ill-timed decisions that reduce value, this risk should be lower for companies with good management. The combination of higher growth and lower risk should be a winning one over time.


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