Are you a trader or an investor?
Traders react to short-term changes in the stock market while investors take advantage of long-term trends. Traders buy and sell stocks weekly, daily or even hourly, while investors use a buy-and-hold strategy that leads to investment gains over the long run. Unless you have extensive knowledge of the markets and hours a day to research stocks, your money is safest as an investor. But to be an investor you first need to know how to think like one. That means you need to learn how to analyze current trends in our economy and see what has the best long-term growth potential.
Take the health food trend for example. There’s been a huge marketing blitz over the past few years to encourage consumers to eat healthy and make smarter decisions about their diet. But does this trend have the potential to make you money? To answer this question you’ll need to examine the trend from three perspectives. First, determine which companies could potentially do well and continue to gain popularity as the trend continues. Second, determine which companies will do poorly as a direct result of the trend. Third, identify the companies whose futures are uncertain, meaning they could be impacted either positively or negatively. These are the companies you should avoid until the trend stabilizes.
3 Questions For The Health Food Trend
1. Which companies will do well?
- Producers that make and package health food
- Stores that sell health food
- The health food products themselves
2. Which companies will do poorly?
- Fast food franchises unwilling to adopt healthy menus
- Producers who make food high in fat and carbs
3. Which companies should you keep your eye on?
- Companies in the healthcare industry: As more people eat health food there may be less need for treatment of heart disease, diabetes and other related illnesses. However, as more people monitor their diet they may be willing to spend more on preventive care. It may be too early to tell how the healthcare industry will be affected by the health food trend.
Once you’ve identified the trend and the industries involved, your last step is to identify the actual companies that you expect to outperform the market. This complete process is called “Top-Down Investing” and involves looking at the big picture in the economy and then breaking down a trend into finer details until you finally decide which companies to invest in. For this last step – identifying the specific companies to invest in – you’ll need to search the internet and newspapers for articles that will give you an indication of the company’s financial stability. As a general rule, you should spend at least 10 hours researching a potential stock before committing to buying it. By using the Top-Down Investing approach you’ll be taking advantage of long-term market trends and learning how to think like an investor.