To have any chance of long-term success operating within the stock market, one needs to understand the rules of the game. For example, if we are playing chess, and you THINK we are playing checkers, you'll never stand a chance at beating me. This post will be the first in a series to help you understand the landscape of the stock market.
When you are looking at any publicly traded company, one needs to be aware of where this stock fits into the business food chain. Think about this as if you were walking into any big box retailer - let's pick Best Buy. Does Best Buy mix up the TVs with the DVDs? Does Best Buy suddenly display a lone refrigerator next to the laptop computers? No. The retailers place goods in groups around the store so that one can easily compare models. In the stock market, our shopping aisles are methodically broken down into groups as well. As a professional, I use the Global Industry Classification Standard (GICS) which was jointly developed by S&P Dow Jones and MSCI. The GICS structure is broken down into the following:
10 Sectors
24 Industry Groups
67 Industries
156 Sub-Industries
Keeping this discussion at a fairly high level, let's just look at the GICS sectors.
Energy
Basic Materials
Industrials
Consumer Discretionary
Consumer Staples
Health Care
Financials
Information Technology
Telecom Services
Utilities
Understanding of the GICS framework can be very helpful when putting together a stock portfolio. For example, don't think you are diversified if you own 5 energy stocks and 7 healthcare stocks. As you can see from the list above, there are several other areas of the economy you may wish to consider operating in. On the flip side of proper diversification, if you already have money in an energy stock or two, perhaps you should look someplace else for a stock in another sector.
In the portfolios I manage, I view each stock like a player on the baseball field. Even if you're not a sports fan (or hate corny sports analogies!), you should intuitively know that you'll never see two pitchers on the mound or 8 players in the outfield. To help work on consistency, perhaps consider the concept of maintaining a fixed number of stocks in your portfolio, so that as one stock is sold, another stock must be purchased.
Cheers!
P. Franklin, Jr.
4/18/2017
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.