Know the Industry
...as well as you know the company
by Rex Moore
LAFAYETTE, LA (July 7, 1998) -- As a guest columnist for the Fool Port that comes from the ranks of the Fool community, it's great to be able to share my lesson here tonight.
Yes, I have learned a valuable lesson in the art of investing, and I owe it all to Innovex (Nasdaq: INVX). Unfortunately for me, it was an expensive lesson.
First, I have a confession to make: I am a day-trader. I go by the name of orangeblood on the Fool message boards. But before all you Fools grab me and throw me over the castle walls into the Land of the Wise, let me explain. I only day-trade with a certain percentage of my portfolio, and the rest is invested in the Foolish Four and some Cash-King type stocks. And besides, it's not really day-trading... it's more like "week-" or "month-trading" because I rarely (if ever) jump in and out of a stock on the same day. Anyway, it fits with my personality and I enjoy it. But I am not here to win converts to my style of investing. Instead I want to talk about a strategy that can benefit any type of investor.
Like many regular visitors to the Motley Fool website, I have kept an eye on Innovex. This company, which makes lead wire assemblies for disk drives, is part of the Fool Portfolio. The Fool Port bought INVX one year ago at $27.71, and at the time I started following it, it had been languishing in the low $20s. But the company had great financials, and continued to turn a profit even while the cyclical disk drive industry seemed to be at its lowest point. As soon as that industry turned around, Innovex would soar... at least that's what most of us thought.
Well, Innovex began to move upward, at one point reaching $27 11/16. I remember telling a friend, "I think the elevator is on its way up, and we've been left at the ground floor." However, the price then dropped back below $25. It was then I happened to catch a small blurb on CNBC one morning while getting dressed for work. "Such-and-such analyst with such-and-such company..." (I don't even remember the names) "...says the worst days are behind the disk drive industry."
Now THIS was the news I had been waiting for! I jumped on the computer, and a quick check showed INVX was up at the open. I quickly executed a buy order, not even knowing if this was a "day-trade" or a long-term buy and hold. (That was a mistake, obviously. I should never buy a stock without a clear idea of why I'm buying.)
The rest is history... or misery. The price began to slide... and slide... and slide. As of this writing INVX is down almost 50% for me, at $13 a share. I now realize that although I was very familiar with Innovex as a company, I was clueless when it came to its industry. In this case, knowing what type of product Innovex manufactures, who its main competitors are, how well the company's balance sheet looked... did not matter. It all looked good to me. But not knowing the industry is what turned this into a (thus far) bad investment. I never, never should have let one gooroo tell me what shape the disk drive industry was in. I should have followed the same Foolish advice for the industry that I did for the company -- that is, to always do my own research and draw my own conclusions.
You can bet this won't happen to me again. First, I need to dig deep and find out the real state of the disk drive industry, in order to help me make a decision on when (or if) to sell Innovex. Second, I will become as familiar as possible with whatever industries are related to my future potential stock purchases. I have learned the hard way that industry knowledge is a substantial part of the successful stock-purchasing equation.
Today, the Fool Port lost 5.2% as its Internet industry stocks finally gave some ground back to the bears. Amazon.com (Nasdaq: AMZN), up several hundred percentage points in the past month, declined 12%. America Online (NYSE: AOL) declined nearly 4%. In fact, Innovex was one of the few stocks that rose in the Fool Port today. For more on Innovex, visit the Fool's recent Daily Trouble on the stock. Today another Fool Port holding is a Daily Trouble -- 3Dfx.
Rex Moore (firstname.lastname@example.org)
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Today's FoolWatch: all the latest in Fooldom.
Day Month Year History Annualized FOOL -5.20% 6.80% 52.41% 411.51% 51.64% S&P: -0.23% 1.84% 18.98% 151.89% 26.57% NASDAQ: -0.07% 0.71% 21.51% 164.95% 28.21% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 109.00 2897.44% 9/9/97 580 Amazon.com 19.11 122.13 539.04% 5/17/95 1960 Iomega Cor 1.28 5.94 363.72% 10/1/96 84 LucentTech 23.81 85.44 258.86% 8/12/96 130 AT&T 39.58 56.19 41.97% 2/20/98 215 DuPont 59.83 76.63 28.06% 4/30/97 -1170*Trump* 8.47 7.31 13.65% 2/20/98 200 Exxon 64.09 72.75 13.51% 7/2/98 235 Starbucks 55.91 56.06 0.27% 2/20/98 270 Int'l Pape 47.69 43.56 -8.66% 1/8/98 425 3Dfx 25.67 16.25 -36.69% 8/24/95 130 KLA-Tencor 44.71 27.56 -38.35% 8/13/96 250 3Com Corp. 46.86 28.69 -38.79% 6/26/97 325 Innovex 27.71 13.75 -50.38% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 77390.00 $74808.13 9/9/97 580 Amazon.com 11084.24 70832.50 $59748.26 5/17/95 1960 Iomega Cor 2509.60 11637.50 $9127.90 10/1/96 84 LucentTech 1999.88 7176.75 $5176.87 2/20/98 215 DuPont 12864.25 16474.38 $3610.13 8/12/96 130 AT&T 5145.11 7304.38 $2159.27 2/20/98 200 Exxon 12818.00 14550.00 $1732.00 4/30/97 -1170*Trump* -9908.50 -8555.63 $1352.88 7/2/98 235 Starbucks 13138.63 13174.69 $36.06 2/20/98 270 Int'l Pape 12876.75 11761.88 -$1114.88 8/24/95 130 KLA-Tencor 5812.49 3583.13 -$2229.37 1/8/98 425 3Dfx 10908.63 6906.25 -$4002.38 6/26/97 325 Innovex 9005.62 4468.75 -$4536.87 8/13/96 250 3Com Corp. 11715.99 7171.88 -$4544.12 CASH $11876.47 TOTAL $255752.90