Spot the Next Big Trade in Three Small Steps

A while ago, I was given advice about how to manage an investment portfolio for long-term investing. It went something along the lines of “When there’s a gold rush, invest in shovels.” The idea behind this is very simple: during a gold rush, those who are looking for gold will need shovels to dig, regardless of if they find the shiny yellow metal or not. As a result, the shovel sellers will always profit—possibly making more than those who were looking for gold!

This investment advice should not be taken literally, as I doubt many shovel for gold now; however, it can be used across the board in a more general sense. Investors who are looking to grow their portfolio can add companies that provide services to a certain sector that’s hot or witnessing robust growth.

To find those companies, investors have to look at the big picture, and then narrow it down from there using a top-down approach. They can find the “next big thing” for their portfolio by taking the following steps.

Economic Analysis

The first and most important step to grow your portfolio and look for the “rush” is to see what is happening in the overall economy; this can provide an idea of where the next big trade is going to be. For example, since the financial crisis in the U.S. economy ended, we have seen many jobs created in the service sector; one industry that can profit from this trend is the staffing and outsourcing companies.

Identification

Not all shovels are the same. Some are very efficient and easy to use, while others, not so much. The same goes for the companies in the industries that are seeing the boom. Investors have to identify what, in their portfolio, provides the biggest bang for their buck. With the service sector being so big, if a staffing and outsourcing service company focuses on just one place, it will not be able to profit as much, and will be even worse if the firm offers the same services where companies are struggling.

Drawing a Conclusion

This is a critical step and requires a significant amount of research. Investors have to look for companies that cater to a broad range of businesses in the sector. One company they may want to look at, considering the job trend, is ManpowerGroup Inc. (NYSE/MAN). This company is well-rounded, with staffing services for a range of companies, rather than one specific industry.

Finding the next big opportunity for your portfolio isn’t easy. Investors have to realize it requires a significant amount of research and time. They also have to know that the trend may quickly turn, and the position in their portfolio may quickly go from good to bad. Investors must make sure they have safety measures in place that can help their portfolio in case they are wrong.

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This entry was posted on Tuesday, October 15th, 2013 at 4:59 pm and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.