Management/motivational guru Stephen Covey discussed the idea of creating a matrix with “to do’s” that fall into one of four quadrants: not important and not urgent, not important and urgent, important and not urgent, and important and urgent. Most people, he suggests, focus on things that are not important but rather happen to be in the person’s face — e-mails that pop up and so on. Similarly, highly effective investors have habits that separate them from less-successful investors.

Very few investors are born with these behavioral traits — the appropriate mind-set, discipline, long-term thinking and the like—and most need to learn them, or to “un­learn” bad investing habits. Here is a simple construct that will help get you 90 percent of the way to making good investment decisions and, more important, to avoiding bad ones. Draw a square and divide it into four quadrants. Label the top row of the large square “good stock,” the bottom row “bad stock,” the top left half-hand column of the square “good company,” and the right-hand column of the square “bad company.” Now we have a matrix with the upper left quadrant being “good company/good stock,” the upper right-hand quadrant being “good stock/bad company,” the lower right-hand quadrant being “bad stock/bad company,” and the lower left-hand quadrant being “good company/bad stock.”

By “good company” I mean a company that has consistently made profits, that has a strong balance sheet, that is a leader in its industry and so on. By “good stock” I mean that the price of the stock relative to the value of the company is favorable — using, for example, the price/earnings ratio. The goal of a highly effective investor is to reside in the “good company/good stock” quadrant. The next best quadrant is “good com­pany/bad stock.” “Bad company/good stock” is a little worse, and the place where you do not want to be is the “bad company/bad stock” box.

Taken to this extreme, the point becomes clear. Let’s look at this matrix in a time of excessiveness in the investment world — the late 1990s and early 2000s. Coca Cola (KO) is a prime example of a good com­pany/bad stock in the late 1990s. It consistently increased its profits from 2000 to 2010, but recently its stock was down nearly 40 percent from its high in the late 1990s. Why? Simply put, while Coca Cola in the early 2000s was certainly a great company, it was a bad stock when it was selling more than 70X earnings (compared to approximately 18X in 2010, KO being now both a great company and a great stock). At a P/E ratio of 70X, the stock was too expensive to provide adequate returns in the short or medium term.

Will Coca Cola eventually provide positive returns to investors who bought it in the late 1990s? As a good company, it likely will within another three to five years — 10-15 years after the stock hit its previous high. This is especially true once we factor in reinvested dividends as these have continued to increase each year despite the stock’s decline. Why? Because earnings have been increas­ing, thus the company can afford to increase its dividend. That is a hallmark of a good company. Coca Cola has a strong franchise, it is in a good industry, and the company has a rock-solid balance sheet. None of these factors has changed or will likely change for years. The price you have to pay for this greatness, however, changes from time to time. Catch Coca Cola or other strong companies when they are both good companies and good stocks, and you will increase your chance for good investment returns over reasonable time periods.

In the good stock/good company quadrant in the late 1990s were stocks like Altria (formerly Philip Morris), which was left for dead around that time, no one caring a whit about the company’s solid and ever-increasing dividend, high profit margins and international growth prospects. While highflyers were crashing all around it, Altria was ex­panding profits and seeing its stock price light up throughout the ’00s. Compare the Coca Cola scenario with a company like JDS Uni­phase Corporation (JDSU). In the late 1990s, the company fit squarely in the bad stock/bad company quadrant. Why? There are a myriad of reasons, but on the “bad stock” side, valuations were off the chart, the com­pany was not making any real profit, and the closest thing the company ever made to a dividend payment was a reverse stock split, which are not words you want to hear. Will those who bought the stock in 2000 at a split-adjusted price of over $1,200 (no, that is not a typo) per share ever break even? Likely not while they are alive. Bad stock, bad company. Embrace the habit of buying good companies which are also good stocks and you will be rewarded over time.