For two weeks now, I have been spending a lot of time with veteran investors: individual ones and professional ones. And talking to them has made me realize that there is always much more to an investment idea that anyone could ever expect.
After developing an investment thesis on a particular stock, you expect that the performance of that company goes hand in hand with your fundament. Nevertheless, many times, that is not the case. And you might end up with the wrong perception of what really happened after you took your chances with the company! It might have risen very nicely, which would've make you tremendously happy, but, maybe, not for the reasons you had hypothesized about. Or, the other way around, it could've dropped significantly with your investment thesis being right, but the market might have felt the time was not right. Either way, it makes you think. And, many of the reasons behind it, we, as investors, don't have control over them. We simply believe in our thesis. Because, there is never a sure investment!
But, there is a solution that might help me and anyone understand the reasons that go beyond the company's control. And, the solution is looking at the periphery. In other words, we need to look at the industry the company is, we need to briefly analyze the industry peers to understand if there is a problem or an opportunity that might make the companies in the same sector benefit. We need to know how consumers are reacting to new product and pricing strategies, and that is not a hard thing to do, we can look at our own behavior, listen to what friends say and simply comparing sales of similar products. Also, we need to, at least, take into account how sales trends around the main country groups are changing. We need to know what situations, like the economic crisis with the problems in Greece, can affect our investment thesis. We need to know what sectors have the greatest potential at the present moment and in 3-5 years. For example, right now, the auto industry can be seen as one of great potential due to the great advances in renewable and environmentally friendly fuel energy. Companies, in Europe, such as Renault or BMW, have showed that their technology has a lot of potential in that area. And if, in 2-3 years, they double the durability of renewable fuel for their cars, the companies are going to enjoy handsome profits!
Unfortunately, nowadays it's harder to determine investment opportunities than it was 20-30 years ago. But, that doesn't mean there are no opportunities, there is just much more to research and places to find them, which makes it more frustrating though. But, in reality, there are plenty and much more opportunities than before!
Now, talking is easy. But, when it comes to actually determining how the trends seem to be shifting is harder. And having lots of stocks in a portfolio to follow and analyze is not an easy task. But you've got to start somewhere! There are plenty of free websites/blogs that once in a while talk about new trends and new potential growth industries. For example, the blog www.seekingalpha.com, www.finance.yahoo.com and may others do provide starting points for further research. And, if you have the time and a bit of money, you can buy trend reports from Reuters and other Research agencies. Or, you can subscribe to services like Valueline.com, which as Peter Lynch viewed it as "The next best thing to having a personal stock analyst". I have done this myself, and it proved quite useful, I must say.
Bottom line here is that it is not enough to conduct valuation metrics, ratio analysis and other financial analysis. Because, even if the company seems to be great, maybe undervalued, it might be affected by factors outside it's range of control. And you have to be alert when that happens. So, my advice, for all investors, and to myself, research about the industry and try to understand what is happening within it: peers, trends, margins, global conflicts, etc. There's always an explanation to what seems an involuntary movement.
Keep Investing.
Take care,
J.P
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