Still Understanding Sectors

Well, we still have some more information regarding sectors to give you to make your investing much easier. We have said sectors represent groups of companies and stocks that represent subsets of the entire stock market. They are companies and stocks, for example, that have similar businesses.

A sector everyone deals with everyday would be healthcare. Within the healthcare sector, you would find companies like Pfizer, United Healthcare, WellPoint, Bristol Myers Squibb, Horizon Healthcare, and on and on. The general sector, then, is healthcare, but the subset that narrows down the field even more are the industries within the sector.

So the healthcare sector would consist of many industries inside it: biotech, drug manufacturers, home healthcare, medical practitioners, long-term care facilities. Within each industry would be a long list of companies and stocks. So you can go broadly into the healthcare sector, then narrow your search to an industry within the sector that you like, then specific stocks within that particular industry.

If you think, for example, that healthcare is going to do very well as a sector in our economy in 2007, how do you go about deciding which industry within that sector is one you want to be invested in?

It’s a similar answer to the question: “How do you get to Carnegie Hall?” – (“Practice, practice, practice.”) Here, when asked: “How do you get to the industry within a sector that you want to invest in?” I say, “Research, research, research.” And it should actually be a fun, detective-mimicking assignment. Think of yourself as the Monk of stock sectors. Set out to do some research, ask some questions, all to find out which industries are projected or anticipated to do well this year.

For example, say you like the healthcare sector already, because you’ve read enough and talked to enough people to know that this is an area of potential growth and profit. But what industry within that sector is going to do exceptionally well, better even than the healthcare sector overall? How do you go about finding out this information?

You begin by watching the news, listening to what people are talking about and concerned about, reading articles in the newspapers and magazines about current issues involving this sector. Where is the interest? What are writers writing about within this sector? What is the state of current hospital care? Drug pipelines? What about baby boomers aging to the point that the medical universe is going to be stretched and need additional infrastructure? Whatever you’re hearing, use it. If a topic keeps coming up over and over again, pay closer attention. See if people are talking or writing about specific companies within the industry of which they’re concerned.

Let’s say you’re hearing a lot about drug development, i.e., new prescriptions for various diseases that plague mankind; pipelines that are flush with new FDA-approved cures for everything and anything; trials that are done and that have produced great results among the people participating. Which companies keep coming up as far as doing exceptional and advanced work in this arena? That’s where you want to put your money.

So it is a lot like an investigation. You set out to answer a very simple question: Which sector is going to make me the most money this year if I invest in it? And then the next logical question is: which industry within that sector will prove to be value-laden? And then, within that industry, which companies, which stocks are going to thrive in the coming year or two?

Keep in mind, of course, that there is no guarantee. This is about doing your homework, doing the footwork, the research, and then making a calculated risk investment. After all, if you could always find the winning sector for each year, and the best industry within that winning sector, and the best company within that industry, you probably wouldn’t be reading this. You’d be lying in a hammock on some tropical island (perhaps one you own!) sipping some exotic drink through a straw.

The stock market is never a sure thing. We all know this. But tracking down the right sector, the right industry, and the right companies within those subsets can prove to be valuable to you as an individual investor.

So go do that research, do some reading, play Monk (without the OCD oddities, I hope), investigate, think, then decide. You’ll feel good about yourself and your investing when you realize that the decisions came from you and were backed by some of your own intelligent preparation.

And we’ll be back next week to continue our insights into the stock market and the exciting and challenging world of investing. And remember: YOU’RE UP TO THE CHALLENGE!!