Welcome to
"StockBreakthroughs Newsletter"
May 11, 2005.
In this issue...
Cyclic Stocks vs. Growth Stocks.
In the long run the economic performance of most countries is showing an upward trend. But, although this is true, the global economy and that of individual countries is always subjected to ups and downs.
Many sectors are especially exposed to these up and down swings.
Building and construction companies, automobile companies or steel manufacturers are all hanging on the economy like a marionette on strings. Large profits are taking turns with setbacks or even huge
losses during a recession.
And the shares of these companies and sectors are substantially affected by the up and down swing of the economy. When profits increase in good times, more often than not, these stocks skyrocket disproportionately. But when profits decrease, investors let go of these stocks as if they carry the plague.
OK. You might say that this ain't a problem. You just buy cyclic stocks when prices are down and sell when prices are up. By low and sell high!
But unfortunately the economy isn't quite that reliable. Especially not the stock market. If it was that easy to make money with stocks, lottery companies would all go out of business in no time.
There are all kinds of factors that can get in your way like wars, a financial and currency crisis like we had in Russia and Asia in the 90's. Or oil prices are giving us a hard time again. So you can't tell with
absolute precission when your stocks have reached the bottom just like you can't accurately tell when your stocks are at their very peak before the market corrects again.
A nice example for cyclic stocks are General Motors and Ford. The stocks of these 2 companies have performed so badly in the past that they were downgraded to junk status by the rating company Standard & Poors.
The headlines at marketwatch.com read this:
GM, Ford debt cuts take toll on stocks.
S&P slashes automakers' credit ratings to junk status.
Shares of General Motors slid 5.9% while Ford shares fell 4.5% after Standard & Poor's cut its long- and short-term corporate credit ratings on GM and Ford to such a low level, that the word "junk status" was out faster than the 2 stocks fell that day.
But what can one expect if you look at the stock charts of these two corporations.
General Motors 10 Year Chart
Ford 5 Year Chart
Holding on to these stocks makes no sense and is a waste of time and money!
Often the reallity with cyclic stocks is, that investors get in to their trade too late and also get out too late. The media is also to blame for this. When the word of an upswing is out, it's in full swing already.
It hasn't just started. Buying then is senseless for an investor that speculates on buying low and selling high.
And when the headlines scream "Recession", the bottom of the valley has already been reached long ago. Selling now makes little sense because by now prices are in the red again.
Also with growth stocks there's no guarantee for the fast and easy buck!
But they have one huge advantage:
In the long run, their prices only point in one direction...UP!
The entry point for a long-term investor is by far not as important as with cyclic stocks. Setbacks are more seldom and, with few exceptions, also not so violent.
A stock like Johnson & Johnson (J&J) or General Electric (GE) is the perfect example for a strong and solid growth stock:
Johnson & Johnson
10 Year Chart
General Electric 10 Year Chart
The 3 dips in J&J's chart and the one in GE was only due to the overall global recession between 2000 and 2003 after the big "Internet Bubble" popped. But while most cyclic stocks are still at the bottom, J&J and GE have long been on their way up again.
These kind of stocks you can always buy without any second thoughts.
In my experience, cyclic stocks will lose you more money and cost you more nerves than you can ever make up for with a few lucky "cyclic" trades.
Yours in Successful Trading,
Ricky Schmidt
Information, charts or examples contained in this lesson are for illustrational and educational purposes only. They should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer at: