STOCKS AND THEIR CATEGORIES


Today we learn about stocks and their types. Let’s begin

However a stock has come to your attention, whether via the office, the shopping mall, something you ate, something you bought, or something you heard from your broker. Before you invest in those stock have you had research on it?

Investing without research is like playing stud poker and never looking at the cards.

All you have to do is put as much effort into picking your stocks as you do into buying groceries. Even if you already own stocks, it’s useful to go through the exercise, because it’s possible that some of these stocks will not and cannot live up to your expectations from them. That’s because there are different kinds of stocks, and there are limits to how each kind can perform. In developing the story you have to make certain initial distinctions.


What’s The Bottom Line?

Procter & Gamble is good example of what we talking about.

Remember I mentioned that L’eggs was on e of the two most profitable new products of the 1970s. The other was Pampers. Any friend or relation of a baby could have realized how popular Pampers were, and right on the box it says that pampers are made by Procter & Gamble. But on the strength of Pampers alone, should you rushed out to buy the stocks? Not if you’d begun to develop the story. Then, in about five minutes, you would have noticed that Procter and Gamble is a huge company and that Pampers sale contribute only small part of the earnings. Pampers made some difference to Procter and Gamble, But it wasn’t nearly as consequential as what L’eggs did for a smaller outfit such as Hanes.


Big Companies, Small Moves

Big companies don’t have big stock moves. In certain markets they perform well, but you’ll get your biggest moves in smaller companies. You don’t buy stocks in a giant such as Coca-cola expecting to quadruple your money in two years. If you buy Coca-Cola at the right price, you might triple you money in six years, but you’re not going to hit the jackpot in two.

There’s nothing wrong with Procter and Gamble or Coca-Cola, and recently both have been excellent performers. But you just have to know these are big companies so you won’t have false hopes or unrealistic expectations.

 

The Six Categories  

The Slow Growers; usually these large and aging companies are expected to grow slightly faster than the gross national products. Slow growers didn’t start out that way. They started out as fast as they could, or else they got too tired to make the most of their chances. When an industry at large slows down, most of the companies within the industry lose momentum as well. Companies pay generous dividends when they can’t dream up new ways to use the money to expand the business, an effort that is mechanical and requires no imagination.

 

The Stalwarts

Stalwarts are companies such as Coca-Cola, Bristol-Myers, Procter & Gamble, and the Bell telephone sister, Hershey’s, Ralston Purina and Colgate-Palmolive. These multibillion-dollar hulks are not exactly agile climbers, but they’re faster than slow growers. When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings. I always keep some stalwarts in my portfolio because they offer pretty good protection during recession and hard times.


The Fast Growers

These are among my favourite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10 to 40 baggers, and even the 200 baggers. With a small portfolio, one or two of these can make a career. Fast growers are the big winners in the stock market. I look for the one that good balance sheets and are making substantial profits. The trick is figuring out when they’ll stop growing, and how much to pay for the growth.

 

The Cyclicals

A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion. In a growth industry, business just keeps expanding, but in cyclical industry it expand and contracts, then expands and contracts again.

The autos and the airlines, the tire companies, steel companies are all cyclicals. Even defence companies behave like cyclicals, since their profits’ rise and fall depends on the policies of various administrations.

You can lose more than fifty percent of your investment very quickly if you buy cyclicals in the wrong part of cycle, and it may be years before you’ll see another upswing. Cyclicals are the most misunderstood of all the types of stocks.

 

Timing is everything in cyclicals, and you have to be able to detect the early sign that business is falling off or picking up.

 



Turnarounds

These aren’t slow growers; these are no growers. These aren’t cyclicals that rebound; these are potential fatalities such as Chrysler. Actually Chrysler once was a cyclical that went so far down in down cycle that people thought it would never come back up.

I made a lot of money for my shareholders by buying Chrysler. I started buying at $6 in early 1982 and watch it go up fivefold in less than two years and fifteen fold in five years. At one point I had 5% of my fund invested in Chrysler. While other stocks that I owned have risen higher, no single stock ever had the impact of Chrysler because none ever represented such a large percentage of the fund while it rose while it rose. And I didn’t even buy Chrysler at the bottom! (-BY PETER LYNCH)

 

The Asset Plays

An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked. The asset may be as simple as a pile of cash. Sometimes it’s real estate.




Story; I once visited a mundane little Florida cattle company called Alico, run out of La Belle, a small town at the edge of the Everglades. All I saw there was scrub pine and palmetto brush, a few cows grazing around, and perhaps twenty Alico employees trying unsuccessfully to look busy. It wasn’t very exciting, until you figured out that you could have bought Alico for under $20 a share and ten years later the land alone turned out to be worth more than $200 a share. A smart codger named Ben Hill Griffin, Jr., kept buying up the stock and waiting for Wall Street to notice Alico. He must have made a fortune by now.

Asset opportunities are everywhere. Sure they require a working knowledge of the company that owns the asset, but once that’s understood, all you need is patience.

 

Congratulation you take one more step towards your financial freedom.

This summary from Book-“One Up On Wall Street”

 

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