Companies come in all different types. There are new companies that have no earnings but lots of potential. There are stodgy old companies that have no plans to grow at all. There are cyclical companies that grow like crazy when the economy is good, but then implode when the economy turns. Then there are companies that seem almost bullet proof, increasing their earnings year after year regardless of market conditions.
One of the first skills needed for stock picking is the ability to recognize one type of company from another. This is critical because building a portfolio involves buying the right types of companies to balance risk and provide the kind of growth that you want. You need companies that fit your personal investment strategy.
For example, if you are buying stocks for long-term holdings, it makes no sense to buy a cyclical company. Many cyclical stocks will probably never increase in price over the long-term, except perhaps because of inflation. They build up capacity by opening factories and hiring huge staffs when the markets are good and they are selling a lot of materials or commodity parts, but then they seem to spend all of the money they have made to close those same factories and lay everyone off when the economy turns. Buy one of these and hold it for fifty years and you’ll likely be exactly where you started.
I am therefore starting a series of posts to describe the kinds of companies that exist and how to recognize them. In the posts in this series that follow I’ll cover the different kinds of stocks, the types of behaviors they exhibit, and when it would be appropriate to purchase each type of stock. This is the first in the series. To follow the other posts, choose the “stock selection” category from the list to the right.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
