Thursday, May 21, 2015

Stock Investing: Awareness, or Where to Begin

All right, let’s start here: it’s not rocket science. Anyone can learn to choose stocks to invest in and you don’t need an advanced mathematical model or a degree in economics. First up, you simply need awareness.

Neo's perception evolves
Surely you remember The Matrix? The central conceit was that humans are pod slaves, nothing but electrical generators connected to a massive power grid controlled by the machines. The world we think we know is actually a virtual reality program pulled over our consciousness like a security blanket, making us think we are productive and enjoying life.

Science fiction, mostly. We are living the lives we think we are of course, but there is actually a matrix overlaid on everything: the marketplace. Some of us see it plainly, but others don’t really notice. It’s all around us. Nearly everything you see (outside of the wilderness) had to be paid for by someone, which means it was sold by someone.

Have a look. Take a walk down your street, and notice the marketplace. You see light-up shoes on that toddler, and a stroller his baby sister squirms in. You see the cellphone in their dad’s hand and the leash on the dog. There’s a tired black hatchback on the corner and a new bicycle on top of it. The woman across the street is carrying a purse and a computer bag, which presumably holds a laptop. All these had to be purchased so all had to be sold. The marketplace.

Tom Brady (not my neighborhood)
But what about the flowerpots and the welcome mats? The landscaping in the front yards, doors and windows, siding and paint, and the houses themselves? The lampposts and the electric cables that run between them. The driveway pavement and the curb, even the ground it all sits on. All of it makes up the marketplace, all of it was bought and sold.

Some folks see it that way naturally and some don’t. Once you see it, you can start looking at things a little differently. Are you seeing fewer hatchbacks, more small SUVs? Different types of strollers? Bigger cell phones?

Now we’re beginning to get back to stocks: I see trends, largely because I’m actively hunting for them. What’s changed this year from last? What is there more of, what seems to be everywhere all of a sudden? That’s where my stock investing ideas come from.

Where I live, in the Northwest, I’m noticing a lot of big construction cranes in the downtown area. New buildings going up all over, probably “mixed-use”—that is, retail stores at ground level, and condos or offices above, or both. That’s interesting. I notice that no one I know buys much recorded music anymore—no CDs, no iTunes, but we’re all still listening to music. Yoga pants, gourmet coffee and craft beer. No one writes checks anymore, it’s all credit cards and electronic payments. Organic food, social networking, hybrid cars. You’ve noticed a lot of this too.

All these trends are market forces at work. All of them are driven by cultural shifts and consumer preferences. All are happening in real time, right in front of us, and all are the beginnings of investing ideas. If you spot the trend, you can follow the chain and begin to identify the businesses that benefit from that trend.

Take the new construction in my downtown area for example. Construction means there is demand for housing, and for office space. That implies rising rents for existing units, as demand must currently outstrip supply. It also means demand for construction materials, for heavy equipment, for labor to build it all. All those new units will need services—electrical, water and sewer, heat, cable for internet and TV. The companies that supply all those things are going to do more business because of those buildings. As an investor, those companies interest me.

Look at craft beer. In most of the country, mainstream American beers like Miller and Coors and Budweiser sell very well and lead the market by a wide margin. But on the coasts, upstart brewers are making products with new varieties of hops or a lot of roasted grains, resulting in a huge variety of flavor profiles. As they have multiplied, these companies have made a significant dent in the sales of the traditional brewers, such that the big guys are worried and have started to answer with new recipes of their own-- or have begun buying up the tiny players to eliminate competition and produce their products on a larger scale. Clearly consumer tastes are shifting.

How about the way people consume music now. Music stores have largely gone the way video rental shops went a few years back. It’s all internet radio and on-demand streaming services. We all know the companies that provide these services, because we all listen to music. But are you paying for it, or putting up with ads instead? There’s money in there somewhere. Follow the money and you’ll find companies worthy of investment consideration.

Not rocket science, as I said. But awareness of the marketplace and the players in it is just the first step. The last thing you want to do is leap before you look. You want to buy stocks of companies that are growing, companies which are well-managed and have vision and whose business model you understand. Companies which are dominating their competitors. I can help you find them.

Stay tuned.

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