Stocks (MP) Among the first things you should be aware before stock investing in “Growth Stock” is to check for bull market conditions. For example, what is the outlook: for the economy, the industry, the product or services your industry produces? Money Pacers’ never advocates grabbing hot stock without paying attention to where the economy is headed. Remember in Value Investing Growth stocks need a climate of growth to thrive. Failure to do your market conditions homework can lead to making the mistake of buying stocks when economic growth is slowing.
Economic conditions will certainly make a huge difference in your investment success regardless of how good your growth stock picks are. Just remember to follow my three main
“Wall Street Rules” to stock investing in “Growth Stocks” below….
Stock Investing #1: The trend is your friend
Markets that are escalating tend to keep going up so long as the economy keeps growing. Markets that are going down are generally declining because economic growth has slowed or is slowing. Rising inflation is the biggest enemy of both stocks and bonds. But it begins to affect some industries before others. Be alert for signs inflation is starting to gain a foothold in any market sector you’re following. Is an industry having a hard time hiring enough workers? Are raw materials costs rising? To cover these higher costs, is the company raising prices of its products, so its profit margins begin narrowing? If so, earning growth is bound to stall. The best time to invest in growth stocks is when the outlook for growth in the economy is good. When the outlook is for the cycle to turn –from boom to bust — then other investment strategies jump to the top of your list.
Wall Street Rule #2: “Don’t fight the Fed”
Another long-time rule of Wall Street is “never fight the Fed.” The best way, not the fight is by keeping an eye on everything the Federal Reserve does: What it does to key interest rates, what key officials are saying about the economic outlook. Are the chairman as well as other officials sounding nervous about inflation or is their concern for the economy somehow muddled? Understand that an increase in any interest rate tends to hurt the stock market.
- First, it threatens to slow economic growth, which tends to hurt stocks in general, and growth stock in particular.
- Second, higher interest rates tend to make bonds a more appealing investment to many people. That usually ends in people shifting money from
stocks into bonds.
Understand the key interest rate. It’s controlled directly by the Federal Reserve, is the discount rate -the rate the Fed charges for making short-term loans to banks. Now check these results of a study of the effect of discount rate has on market performance for the 50 years between 1948 and 1998. The study concluded that when the Fed lowered the discount rate, the market was higher a year later 100% of the time. When the raised the discount rate, the market was higher 12 months later only 71% of the time.
Wall Street Rule #3: “Don’t follow the lead of others”
In terms of stock investing in growth stocks, watch your back. Blindly following any one-star mutual fund manager, hedge fund manager, newsletter publisher or successful investor such as myself can be hazardous to your wealth. Study investments in general, and stocks you want to purchase. But don’t fall madly in love with any one investment advisor meaning don’t build and then put all of your investment strategies in one basket. If this at all doesn’t make sense let me introduce you to a few of Bernie Madoff former clients. These were lucky enough to have some of their financial eggs in a basket with me.
Look, even consistent successful investors like me sometimes misstep. Nobody’s perfect, and even legendary billionaire investor, Warren Buffett! As you know Mr. Buffett is chairman of Berkshire-Hathaway Inc., a multi-billion dollar holding company based in Omaha, Nebraska. In 1998, the “Oracle of Omaha” went against his own investment beliefs and sold off some stocks, including shares of one of his largest core holdings, McDonald’s. That year, McDonald’s stock soared almost to 83%. It wasn’t long before Buffett made this startling confession to his stockholders at their annual meeting, “We made money this year but, we would have made more money if I hadn’t made any stock trades at all. You would have been better off if I had regularly snuck off to the movies during market hours.”