Are you investing in the right industry?
Part 1
Does the term book-to-bill ratio sound familiar to you? Do you know the demand and supply numbers of private condominiums in Singapore for the next year ? If you do, you must have already (performed) some sort of industry analysis on the electronics and property industries or sectors as commonly (referred to) in stock market terms.
Most (investment) processes include some sort of industry analysis. This is important because many studies have shown that over a period of time, some industries have per-formed better than others. For example, between 1987 and 1996, banking stocks in Singapore have (generated) better returns than other industries such as shiprepair. Industry analyses will uncover these performance differences and help identify both (unprofitable) and profitable opportunities
(situations).
It is also important to note that past performance alone will not help predict future performance. The factors or conditions that helped an industry to prosper in the past will change over time. (Identifying )and studying these factors will provide some clues to the entry and exit points of the investments. Going back to our earlier example, economic growth is an important criterion for banks' (earnings). Between 1987 and 1996, Singapore enjoyed an uninterrrupted average GDP growth of 8.9%. This allowed the banks' earnings to grow at a compound rate of 11.3% when the broader market generated only 8.5% growth. With GDP growth (decelerating) because of the Asian crisis, can we maintain the same (sanguine) outlook for the banks?
Having determined that industry analyses are important for successful investing, the next step is to find out how we can go about doing one. There is no (generic) framework that is applicable to all industries, but there are commonalities which we can identify. In a free market economy, demand and supply are key determinants of price, and price is always an important contributor to any profit-driven (organisation). Hence, a successful indstry ana-lysis will have to identify the underlying factors (driving) demand and supply.
