Do you think that, choosing a right industry is important in order to protect our capital?
Sometimes, we will forget the rules of investment. We will attracted by the low price of a stock, low PE ratio of a stock, but we have ignore the industry that this stock is in.
Try to check from your stock investment portfolio, are there any industries that will face stiff competition in future? Are the companies that you choosed, need to pump in huge capital every year to maintain the profit margin? Are the companies that you choosed, can maintain its growth or earnings in the economy downturn? Can the companies protect your capital from the high inflation?
Let's do a comparison between two industries, the insurance industry compare to airline industry.
Capital Investment:
Insurance industry is a high network business, once the business networking stable, the capital investment pump in will reduce to generate earnings growth. But for airline industry is different, it need to pump in huge capital to buy extra planes for expansion purposes. The expansion risk of the airline industry will be higher than insurance industry.
Maintanence Cost:
If that industry that you choose need high maintanence cost, it will reduce our profit in long term. For airline industry, maintenance cost is extremely high. But insurance industry's maintanence cost is low compare to airline industry. Risk reduce.
Raw Material Cost:
As we know that, more than 40% of airline industry cost come from crude oil. The fluctuation of the raw material cost will reduce the earnings margin of airline company. But for Insurance industry, the effect is less.
Economy Downturn:
As we know, in the economy recession every industries will face the earnings pressure. But which industry will face a deep earnings pressure, which industry face less earnings pressure? Let's imagine, in the economy downturn, people will reduce their expenses or traveling, it will directly affect the airline industry. With a high maintainence cost for airline industry, it will make airline industry face a great pressure. But, in a economy downturn, will u ignore to protect yourself from accident?
So......let's choose a company that is in a potential industry, in order for us to sleep nicely everyday!
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3 comments:
Of course, as investor we really need to do our homework before make any investment choice. In current inflantionary enviroment driven mainly by rocket high commoditiy price, almost all sector will affected, except those involve in plantation and oil and gas industries. Even insurance/investment banking company such as takaful, MNRN would affected too, as part of their premium received is for investment purpose eg stock, real estate, money market etc. Unless, this company like other global player invest in crude oil future contract
Dear hng,
You are true, unless the company that we invested put out money into safety portfolio like government long term bond & etc.
But many investors in the market they will not consider this, they just solely depend on the historical price & PE ratio of a company as a judgement to buy or sell, especially when i see people ask "the price is cheap, is it the time to buy?"
So, let's put in more studies before we decide on any company.
Cheers~~
Dear Jeff7
Current investment should emphasize on bottom-up approach as marco-economy is full of uncertainties. Each sector would have hidden gem waiting for us to pick up, especially when sentiment factor overshadow its intrinsic value. In addition, making money isn't just about picking stocks, its also about avoiding mistakes that can harm investment portfolio and individual risk appetite as well as time horizon also have to take into consideration. While historical price and PE can act as reference, the more correct way should be business models whether it is still relevant in current market and stay competative and have wide profit margin. Hope we all could learn from past mistake and improve our skill and knowledge in our investment journey.
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