This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)
With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.
Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to look for, then we'll list a few ways of finding information.
Needs and desires --
Observe how needs and desires change over time. Note that there is a difference between needs and desires. In either case, however, changes translate into new markets created and goods and services provided.
Desires can be thought of as tastes and preferences. Most people didn't need an SUV but many people preferred to drive an SUV. Is that trend changing now? What companies will benefit from the change? Everyone likes big screen TVs -- who makes them or the parts that go into them?
As for needs, it is clear everyone wants to be healthy. The baby boom generation will soon be retiring in droves. The elderly tend to have more health problems. This train of thinking leads pretty directly to the conclusion that it might be a good idea to beef up the portion of your portfolio devoted to health care stocks. Here is a case, however, where we have a very broad trend that we recognize. In this instance, it might be more reasonable to choose a health care mutual fund or ETF rather than try to identify the one or two stocks most likely to benefit.
Doing the right thing --
In general, people like to do the right thing. This might not always be true of certain companies but for most individuals it holds true. Trends based on doing the right thing often take quite a while to develop before achieving the critical mass that allows real markets to be formed to address these trends.
An example of this is the "green" movement. Individual consumers demand a cleaner environment and less waste. Companies eventually respond with fuel cells, solar panels, wind farms, new recycling techniques, etc. This trend has been around for decades but it is only recently that the largest companies started listening by developing hybrid cars, for example. The "green" market is just beginning to mature and keeping an eye out for companies that can take advantage of this trend will surely produce stock market profits.
What to watch out for --
Many stocks, especially small young companies, see their stock prices skyrocket based on a single product. Don't forget to ask yourself whether the company producing that product can sustain profits and continue to grow.
Avoid short-term ephemeral trends. An investor can end up chasing the flavor of the day rather than tapping into a long-term growth story.
Where to find ideas --
Many of the following have both print and online versions and it is often a good idea to subscribe to their RSS feeds or email newsletters.
- Newspapers - the oldest media example but still useful. Newspapers are more likely to provide thoughtful, in-depth analysis than a simple blog post. I myself can't do without the Wall Street Journal. Others prefer Barron's or the New York Times. Read a paper and look for those articles that might give a glimpse of the future.
- Magazines - Wired, for example, might be earlier at identifying trends than a more mainstream publication like Time magazine. Still, it pays to read widely and be curious.
- Blogs - Gizmodo, LifeHacker and others are good at discussing the latest trends among the techies of the world. They often have blogrolls listing other similar blogs; surf a few and see what you find.
- Marketing - eMarketer, for example, examines trends in Internet marketing which is something I happen to be interested in. There are other marketing web sites that address various kinds of industries and marketing approaches. They are often trying to latch onto the next big thing or understand the latest cultural goings on. Articles published on these sites can be early warnings of trends about to hit the mainstream.
- Metrics - Nielsen is always trying to identify trends on line and off line. Some of their data is free. Look around for other measurement companies and data. This can sometimes tip you off when a trend is beginning to develop some critical mass.
- Universities - I myself subscribe to the email newsletter from the Wharton School of Business at the University of Pennsylvania. There is usually at least one interesting article in each edition. Experiment with different universities known for their "talking heads" and experts; subscribe to feeds or newsletters. You never know what might pop up.
- Industry web sites and publications - you don't always have to be a subject matter expert to be able to benefit from industry news and announcements. If you think an industry sector has something going on, visit company websites or industry association web sites and see what is getting the most attention.
It is within the grasp of all of us to identify trends in business, lifestyle or culture. Being aware of what's going on around us and being able to apply some perspective should help us identify markets that are growing and hopefully avoid those markets that are shrinking. In today's global marketplace, it also pays to be aware of other cultures and countries and the trends taking place there.