By Rob Landley (TMF Oak)

Nothing's so hard but search will find it out.
- Robert Herrick

Here at The Fool, we make it our business to tell you things you already know. And we're good at it, too. This time, we're so sure you already know the correct answers to the challenging problems of finding investment ideas that we're going to come out and ask you to help us.

But first, the amazingly obvious:

Supply and demand are the two forces that rule any business marketplace. The greater the demand for them, the more Tickle-Me-Elmo dolls that a company can supply to meet that demand, and the more they can charge for their fixed supply. Since you probably don't run your own manufacturing conglomerate, you might not know a whole lot about supplying products to a mass market. But as a consumer, you know an awful lot about demanding them.

Given this, our crack scientists at Fool Global HQ and at our Fool Remote™ satellite stations around the globe did a few million hours of research on the link between consumer buying and stock-market investing. And they've drawn the following conclusion: You'll improve your returns -- often dramatically -- by investing in companies that you (and often everyone else) know.

In Step Four then, let's follow your consumption money.

Where do you spend money? Look around you. The La-Z-Boy chair, the TV, your exercise equipment, the refrigerator, the clothing strewn across your child's room. Who made all that stuff? Which company brandnames jump out at you? You'll probably agree that you're much more familiar with the brandname of the soda that you drink every day than the name of the company that made your reading lamp. Why? Often for no other reason than that you buy more soda and that you see the company logo every time you crack open the bubbly. Keep that idea in your head, Fool. In the Rule Maker portfolio, a few of the companies we'll buy, we'll do so because our repeated purchasing of their products results in free promotions for them.

More questions for you...

You're using a computer right now. Who built it? And who made the parts for it? You don't have to dig open the back of the machine to see a few names. Next time that you turn it on, just watch the company brands and logos roll through - Network Associates' virus detection, MicroApplesoft operating system, maybe you flip over to Amazon.com or Excite or Yahoo! or into an Electronic Arts software game when you get going. More and more people are using computers.

We wonder what percentage of the people that you know both own a personal computer and have their own machine at work. Desktop computers are starting to pop up everywhere. And children are using computers more than their parents and grandparents. As we'll be investing for the long-term here, we're going to be looking for products and services that we expect to be popular for many, many, many years. When kids regularly use products that aren't just for kids - like computers, telephones, fruit juice, blue jeans, et cetera - we sit up and take note. There may be permanency there!

Now, we don't want to drive you batty with questions... but we see that sandwich to your left. What is that - salami and cheese? Who makes that stuff? I'm going to help myself to a bite of your sandwich right now, is that okay? Mmm, not bad -- more mustard next time please. Thanks. Wow, that's a lot of mayonnaise on there, too. Where did you buy all of that stuff, which market? Safeway? Hannaford's? Whole Foods? As you might imagine, supermarkets are a defensive investment -- only in the worst of times are we going to simultaneously cut back on food and relentlessly price shop at the market. Supermarkets are here to stay, in good times and bad. When the economy sours, chances are we won't be buying $3,000 personal computers, but likely we'll still be buying the same $100 of groceries each week.

Ok, Fool, you're thinking a bit about companies whose products you use. You're beginning to see the power of repeat-use consumer branding. You're starting to recognize that there are certain companies which don't seem likely to go out of favor. And now, we're getting close to the end of this interview. But we'd like to follow you to the office tomorrow and spend a few hours there. Okay?

Mark Jackson, a point guard in the NBA, recently said, "My father told me that if I find a job that I love, I'll never work another day in my life." Pretty convincing. Do you enjoy your job, Fool? Well, you can probably find some great public companies in and around your offices, too. It's one place where you have a natural insight into the supply side of things. Where do you work? Is it a good business to be in? Who supplies the stuff you need to do it? Why do your "customers" turn to you and what else would those people buy? Week in and week out, on what do your bosses spend their money? More paper for the printer? More backbone for the internal network? Dilbert calendars for everyone's desk? These different companies - they're everywhere!

Mon Fool, we have only one remaining round of questions here in Step Four.

What do you do for fun? Do you see two movies a month in the theatres? Do you get any regular exercise? Ahh, good. Do you work out at a gym? You ride a bicycle, you say. Who makes that bike? Oh really, it's been a clunker. . what's the company's name again? Gotcha. Whattabout other leisure activities - have you bought any games or compact discs or read any good books recently? Who published them? Do you find yourself consistently buying these items from a single company? How about television - are you a Rupert Murdoch junkie (Fox) or a Ted Turner fan (CNN) or do you not even know who publishes or broadcasts programs at you? Interesting.

You can now see that listing hundreds of companies whose products and services you use is pretty easy. During this short interview, we've directed your eyes toward companies like Sony and Nabisco, like International Paper and Compaq Computer, like Procter & Gamble and Disney. Your challenge now, as a long-term investor, is to distinguish between good and bad. You are now in search of the businesses that are built to last and built to create value for shareholders, as opposed to the ones designed only to compensate executives over the next ten years.

But how do we figure which they are?

Stick with Brandnames: Frito-Lay Fritos or "Generic Corn Chips"?

The purpose of corporations, as you know, is to make a profit -- cash is like oxygen to a public company. Without it, a company's head turns blue, momentarily it sees stars, then it's all over. Everyone goes home dressed in black.

In order for companies to survive and to thrive, they have to design offerings for which they can charge more money than it costs to provide them. The costs of running a business are substantial -- employees, benefits, equipment, office or factory space, parts and supplies, insurance, travel expenses for the sales force, a monstrous phone bill, and various marketing & promotional fees. Why would a consumer, like you, be willing to pay more for something than it cost the company to supply?

Because you need or love what they're offering.

But there's an important follow-up question. Why would you pay more money for one company's product when their competitor offered virtually the same thing for less? The answer is the brandname. People pay more for brand names. Coca-Cola can cost up to 50% more than the generic store-brand soda, and yet it sells ten or a hundred times more than the competition! Fools, it's in the name brand. Computer buyers now want Intel chips inside of their computer, even when comparable chips can be had for the same price. Stamp the word Nike on Vietnamese imports and people want those shoes even when they cost more than a lobster dinner... for four! Even when they cost significantly more than very similar shoes offered by a competitor. You see, Fool, we're in the habit of buying these products. The brandnames have helped create those habits.

And, Fool, brand names don't only help with the price, they also help with sales volume. McDonalds doesn't charge more than the other burger chains, but how many others can claim to have served billions upon billions of burgers since their inception? Wal-Mart is cheap and proud of it - their brandname now means cost-cutting and bulk supply. And Wal-Mart's store aisles swell with Walters and Annies pushing giant shopping carts overflowing with stuff. It's in the brand. One more -- how is Tylenol any different from generic, unbranded aspirin? I don't know... but when my head hurts, I buy Tylenol.

That's the power of a brand; that's the force of habit. But, c'mon, you say, investing successfully has to be about more than just investing in big-name brands. Well, it is -- but only slightly. Read on.

Our Everyday Brands

Next, we need to figure out which of these brandnames is really raking in the loot. Foolish scientists have concluded that companies with strong brand names that also run a repeat-purchase business model have awesome opportunities. Repeat purchase? Yep. Here we're referring to the stuff that you buy every day, week or month.

For example, if The Antique Boutique Inc. sells you a solid oak table that you pass on to your grandkids when you croak -- that's a business built on a one-time purchase. Not a repeat purchasing. Consider, instead, the company that sells you a cheeseburger every day for twenty years (by the way, we don't think you should eat that many cheeseburgers... but we're not trained medics.) Now which of these two companies are you going to spend more money on in your lifetime? Notice that you have an answer, and I didn't even tell you the price of the table or the burgers.

This stuff ain't rocket science.

There's another hidden value to all that repeat purchasing, as well. Every time you buy a can of soda, or that McBacon Burger, or your loose-fitting jeans, or that squeezable tissue paper, the company selling it to you picks up some free promotion. You repeatedly see their corporate logo when you buy and use their product. You unwittingly become loyal. You become comfortable. And you're not alone. We do the same. Compare that to companies offering infrequently-bought products and services -- from automobiles & repair... to houses & furniture... et cetera. Those companies have to spend a lot of money to promote themselves, to remind you to go to them during the few times you shop for their wares. And that promotion costs money!

The opposite is true of repeat-purchase consumer brandnames. You go out in search of them every day, every week. And they gain free promotion each time you use their products. And they can end up with a bundle of loot for it.

Step 5: Getting Information on Your Companies »