If you’re new to markets, you might be wondering what to make of all the talk about interest rates, inflation, gold, the economy and all the rest of it.
Which stocks do you actually look to buy?
We can boil the name of the game down to something much more simple.
When it comes to shares, the stock market wants to see primarily one thing.
That one thing is growth.
We’re talking growth in all forms: earnings, profits, market share and industry.
Yep, growth, that’s what it’s all about!
Former Australian fund manager Matthew Kidman wrote a book in 2012 called Bulls, Bears and a Croupier.
He sums it up like this…
‘It is virtually impossible for any company to attract new investors if it offers absolutely no earnings growth. Growth is the drug of the market and once a company loses its earnings growth, it has effectively lost its appeal.
‘Investors will dramatically re-rate the company, selling its shares and heading to the exit door en mass.
‘For a company to be recognized as a growth stock, the market must feel comfortable that, over the long term, the company can grow its revenues and profits at a much higher rate than the prevailing general economy and the overall market.’
That’s why the market is always on the lookout for the latest technologies and industries: because that’s where the best growth potential is.
Markets have always been like this, and always will be.
These days we get excited about things like 3D Printing, self driving cars and space travel.
But the items we all take for granted around us were new and exciting once, too.
Here’s an example…
WD Gann wrote his book Truth of the Stock Tape in 1923.
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1923? Think about that era for a moment. They called it the Jazz Age.
Oil as a fuel source was relatively new. So were cars, and not the self driving ones. And picture theatres…and radio shows.
WD makes this following comment in the book…
‘In future you must watch for the new industries that develop and get into their stocks…
‘In my judgment, the Aeroplane and Radio stocks will be the ones in the next few years that will make fortunes as great as any that have been made in Oils or Motors.’
Yes, radio technology was a growth industry once.
Old WD knew a thing or two about stock markets.
Radio Corporation of America (RCA), for example, traded at $1.50 in 1921.
In 1923 when Gann wrote Truth of the Stock Tape, it traded $4.75.
By 1928, the stock was worth $420 per share.
If you want to find stocks that go up, look where the growth is.
Markets were like that in Gann’s day and they’re the same right now. They still will be this way a hundred years from now.
Callum Newman (& Terence Duffy)