An excellent question that I often get concerning personal investing and retirement saving is what is the most important factor when screening for personal investments – the Industry? – the overall Market? – or the Company and its stock?
As we peel back this onion you will learn some critical principals about personal equity investing and the forces that control your investment value. We will analyze all three variables to determine which is the most important.
The overall market dynamics have a major influence on all individual stock prices. In a rapidly advancing market uptrend, usually about 70% of all stocks will advance in price. It a case of “a rising tide raises all boats” as they say.
This is even more true in a down or bear market. In a rapidly declining market often 80% of the stocks will be falling in price. The reason for the larger percentage is that bear markets are usually characterized by very steep index declines.
If you are trying to invest for short term profit therefore its critically important to pick a market in a strong uptrend and avoid one in a steep downtrend. Therefore, its hard to understate the importance of analysis of overall market conditions as part of your personal investment due diligence.
Its equally obvious that its especially important to fully analyze the underlying company before investing in its stock. How strong is its balance sheet? How much of a debt load does it carry? What is the company’s revenue history and more important future revenue prospects? Does the company make money and how much? These and many others are important questions that the investor must find answers to as part of the stock analysis process. And finally, do not forget the stock charts and the stocks relationship with past and future investors.
With so many questions and so many areas to analyze its tough to understate the importance of the underlying company when selecting a stock for personal investment.
So far, we have got two factors, the market, and the company, that are equally important in the personal investing process. I say “equally important” because its obvious that neither factor can be ignored or even glossed over in the search process.
But what about The Industry? Surely that cannot be as important as the other two.
Do not be too sure!
Think of the soft drink industry as an example. Do you really think you can do an effective job of analyzing the prospects of say Coca Cola without understanding what Pepsi is doing and what the prospects are for the rest of the soft drink industry? The fact, individual market forces effect the prospects for a all companies in an industry.
When terrible weather is grounding air travel and cancelling flights is one airline immune? When new regulatory requirements within an industry creates additional costs and product delays is it likely that one company will be immune? No, of course not!
Now add in a particularly important player being the analyst for the mutual funds. You see, while Mutual Funds often fall in love with and invest in individual companies, they are just as likely to be in love with an individual industry as well. If analysts like the prospects for an industry, they tend to invest in the industry leaders (think – Pepsi and Coca Cola).
The opposite is also true. If the analysts do not like an industry’s prospects they will avoid investing in that industry. This will result in the members of the industry having their stocks getting little attention. While the overall market rises, this industry will stagnate. In the end, its rare to find big stock winners in industries that are currently out of favour.
The fact is that all three of these major variables are critically important. You cannot ignore any when doing market research. Each can have a huge influence on the price of an individual stock.
My belief is that the importance can be shared equally – one-third for each factor. Even more important, none can be skipped as part of your personal investment analysis routine. Remember – It is the opposite of baseball – One Strike and you are OUT!
Island Equity Systems designs and markets equity trading systems for the personal investor