In the current environment it is more important than ever for an equity investor to make a distinction between the daily price fluctuations in the stock markets and the underlying fundamentals of the companies he/she is invested in and to remember that it is the latter that will win out in the long run.

The bull market in equities that began in late 2002/early 2003 seems to have ended in October of last year. While it is possible that the markets have found a short-term bottom and experience a significant rally from current levels, there are still lots of potential developments in the credit markets and the economy that could trigger a renewed decline in stock prices.

Yet, it is also at times like these, when optimism has turned to pessimism, that a long-term investor trying to buy shares of a quality company at a reasonable price will find interesting opportunities.

Where should an investor look to find companies that qualify as good long-term investments? Here are three general ideas:

1. Avoid sectors where operating margins are much higher than their historical average.

History has shown that when profit margins in an industry are far above their long-term average, they tend to decline and settle below that long-term average for a while before rising again. This is due to the fact that in a free market system, high profits attract competition causing profit margins to decline (until low profits lead again to less competition and rising margins).

Amongst the major sectors, energy, materials and industrials currently have very high margins. These sectors are also favoured by a lot of investors because of the 'China' effect (the argument being that the industrialisation of China and other developing countries will lead to an ever-growing demand for commodities). They therefore combine high earnings with relatively high valuations, a dangerous combination for a long term investor. If operating margins in these sectors go back to their historical average, earnings will suffer.

2. Prefer companies that benefit from the positive growth dynamic in the emerging world.

Whereas the world economy has been dominated by the United States, Western Europe and Japan since the Second World War, the global balance of power is beginning to shift. The economic, financial and political power of Asia, Eastern Europe, Latin America and the Middle East/Africa will rise in the decades to come.

One way for investors to capture the rapid growth in developing economies is via emerging market equities. Another is through European or US companies that are globally-geared and benefit from strong private investment and consumption growth in the developing world.

On the other hand, it seems prudent to avoid companies whose earnings are derived to a large degree from the US consumer. Over the last few years, the savings rate in the United States has been suppressed by the slowdown in the growth of household incomes. The difference between income and spending has been met by borrowing. The capacity to borrow has now disappeared for a lot of households which will weigh on consumer spending in the next few years.

3. All else being equal, prefer companies with solid dividends.

Numerous studies have shown that buying companies with high dividend yields is usually a very profitable strategy over the long run. This makes sense given that a high dividend yield is often associated with companies selling at low prices in relation to earnings or book value. A solid dividend also instils confidence given that a company needs to have real earnings to pay a dividend. And, contrary to a popular view, historical evidence has shown that companies that pay out a relatively big part of their earnings as dividends, actually grow their earnings faster because they have the discipline to maximize the value of their retained earnings.