Picking stocks

There are many uncertainties in what is going to happen in the future. Because of this, investors like to analyse every piece of data to try to determine the best way to profit. Now, of course information is power, but the more important old saw may very well be that a little information is a dangerous thing.

As we see companies report profits or we see data such as monthly jobless claims, the reactions are often very swift and very violent at times. However, if you look at the same data in a long term series, it sometimes shows a very different scenario.

Clearly each company in an industry has some impact on the industry as a whole. But if you consider two companies that both report earnings one may do well while the other may not. Further, the two companies may give us very different projections based on how they see the market they are in. It certainly says a lot more if both of them do well or both do badly, but we do have to realize that in the current environment competition has increased and consumers are more selective. You need to offer the better value and perhaps be in the better location to succeed.

Similarly with much of the economic data. We still have many companies failing because they were unable to adjust to the changing economic climate. Other companies are grabbing their market share. However, a failed company will fire 100% of their employees while a company that grabs share will never hire all of the losing companies employees. Generally they can absorb much of the business with slack in their own company and only after they do that will they hire some of those that lost their positions.

This will lead to more new claims and less hires but it is greatly increasing the productivity of the survivors. So as the economy improves, it will be a while before it has absorbed all of the slack in the workplace in most industries. This will result in greater productivity numbers and greater profitability, the trick is simply to invest in the survivors.