Stock Investing For Dummies®, 3rd Edition

Chapter 13. Analyzing Industries

In This Chapter

• Selecting industries by asking a few important questions

• Keeping an eye on four major industries

Suppose that you have to bet your entire nest egg on a one-mile race. All you need to do is select a winning group. Your choices are the following:

Group A: Thoroughbred race horses

Group B: Overweight Elvis impersonators

Group C: Lethargic snails

This isn't a trick question, and you have one minute to answer. Notice that I didn't ask you to pick a single winner out of a giant mush of horses, Elvii, and snails; I only asked you to pick the winning group in the race. The obvious answer is the thoroughbred race horses (and no, they weren't ridden by the overweight Elvis impersonators because that would take away from the eloquent point being made). In this example, even the slowest member of group A easily outdistances the fastest member of either group B or C.

Industries, like groups A, B, and C in my example, aren't equal, and life isn't fair. After all, if life were fair, Elvis would be alive and the impersonators wouldn't exist. Fortunately, picking stocks doesn't have to be as difficult as picking a winning racehorse. The basic point is that it's easier to pick a successful stock from a group of winners (a growing, vibrant industry). Understanding industries only enhances your stock-picking strategy.

A successful, long-term investor looks at the industry just as carefully as he looks at the individual stock. Luckily, choosing a winning industry ...