Don't Confuse Company Growth with Industry Growth

Company growth is important when you are selecting stocks. Many investors choose stocks that are growing because of the industry, instead of anything that the company is doing. Sometimes entire industries will grow at a rapid pace. For example, during the 1990's, technology stocks all tended to grow at fantastic rates. It almost did not matter what company you invested in as long as you were in the technology sector. Once the technology bubble burst, many of those same companies lost value quickly. Only the companies that were fundamentally sound remained in good shape.

Industry Growth

It is important to choose a company based on its own merits, instead of the industry that it is in. There is nothing wrong with taking advantage of industry growth. However, if you invest in long term growth, the companies that are growing because the rest of the industry is growing will not continue to do well. If you can choose companies that will do well on their own, you will have a much better return over the long-term.

Market cycles tend to affect industry growth as well. During a recession, industrial companies that make raw materials tend to do better than companies that focus on luxury items. Once the recession is over, companies that are fundamentally sound will continue to do well.

Research

When you are looking for stocks, you want to make sure that you do a thorough amount of research about the company first. This will allow you to determine if the company is growing because of things that it is doing or because of the growth of the industry as a whole. 

The first thing that you need to look at is the industry that the company is included in. Look at some of the other companies in that industry to see if they are growing as well. If the other companies are not going through a growth period and your company is, then it is safe to say it is growing based on its own merits. 

If all of the companies are growing at about the same rate, then you will need to do some more detailed analysis. You are going to need to look at the company's financial information and documents to find out more about them. You need to take a look at the business plan of the company. Find out exactly what its strategies are for continued growth. Ideally, you would like to see a business that has a fairly unique business plan. If it seems like the company is simply copying what everyone else in the industry is doing, there is a good chance that it is simply growing because the industry is going. 

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