Friday, 15 August 2008

A Guided Tour of the Stock Market

A Guided Tour of the Stock Market
(Focus on the tools for understanding different areas of the market.)

It’s easier for companies to make money in some industries than in others. Moreover, some industries lend themselves to the creation of economic moats more so than others, and these are the industries where you’ll want to spend most of your time. The economics of some industries are superior to others. Hence, you should spend more time learning about attractive industries than unattractive ones. You should select those stocks that you think will perform better than others and invest heavily in your top-rated stocks.

Every industry has its own unique dynamics and set of jargon and some industries (such as financial services) even have financial statements that look very different from others. Study the different economics of each industry and understand how companies in each industry can create economic moats – which strategies work and how you can identify companies pursuing those strategies.

Where to Look?

Health care
Consumer services
Business services
Asset management and Insurance
Consumer Goods
Industrial Materials


There are areas of the market with worthwhile investments because they contain so many wide-moat companies. There are great firms in even the least likely areas of the stock market.

When analyzing a company in a specific area of the market, seek answers to a few essential questions:

How do companies in this industry make money?
How can they create economic moats?
What quirks does this industry have that an investor should know about?
How can you separate successful from unsuccessful firms in each industry?
What pitfalls should you watch out for?

Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises. The ability in compiling that mental database will make you a better investor.

Reference: The Five Rules for Successful Stock Investing by Pat Dorsey

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