Welcome back to our continuing discussion of the seven worst mistakes that investors tend to make when dealing with the stock market. If you missed last weeks edition, be sure to take a look at stock market investing mistakes part 5.
These are mistakes that you might tend to make while thinking that you’re doing something wise, only to realize that you overlooked a crucial detail that ruins your whole plan. For that reason, it’s very much worth your while to learn what to look for in a stock, and how to avoid these all too common pitfalls.
Sector Trends
This time, we’re going to talk about sector trends. Typically speaking, a stock will perform in some sense of unison with the other companies in its industry, or sector. Of course, there are rare exceptions.
A company making microprocessors might well suddenly take off ahead of the competition when it seemed like the entire microprocessor industry was in a lull. However, when this does happen, it’s almost always the result of some exceptional force that the other companies just can’t replicate.
For example, the company might have just released an innovative new product, or the other companies might have been involved in lawsuits that drained their finances during this quarter. Whatever the case, there is always some external reason for it.
Look At The Industry As A Whole
In other words, when you’re looking to buy a stock, it’s quite reasonable to expect that the performance of that stock will be tied in some ways to the other companies in the same industry. It goes without saying that some will outperform others, but the point remains that an upward movement in a few of the companies tends to forecast an upward movement in the rest, and vice versa.
If you keep this in mind when investing, it can even become a powerful tool for prediction. If you see a sector moving up as a whole, try jumping on the bottom performer in the group. You should be able to buy at a value, and see some profit in a short amount of time.
See you next week for the final edition of Stock Market Investing mistakes.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 3 comments… read them below or add one }
The more I read about these mistakes to avoid, the more I like Warren Buffet’s ideas of obtaining stocks in things that people will always need or want e.g. food, soap and so on. Says something about my level of risk aversion doesn’t it!
This also is related to the article on being aware of macro-economics.
Hi Sean,
Looking at the sector trends is a great idea. I really like your tip of finding the lowest performer in a sector that’s trending upwards and buy some stock in it.
It seems like a really simple way of choosing stocks and I’m sure there’s more to be done than this before choosing a stock.
Sector trends need to be considered when looking for a good stock to buy.
I agree with what you say about under performing stocks that have great potential need to be put on your watch list. This is a great way to make money on a stock if all the boxes are ticked.