The 3rd Time On Selecting Shares from the Industry Point of View

Li Jian, translated by alex,

Besides “three high” industries( “lhigh input”, “high debt”, “high energy consumption”), some other industries have not been performing as people had expected. Just check the statistics of the 20-year-old stock market and think, it’s not difficult to find out something.They were born with a ceiling.

Let’s sort them into 5.

1. Ceiling of price:

It’s easy to understand, as the price of products is limited or supervised strictly.Among many industries, people don’t own the power to make decisions of increase in price.Utilities is a main part, such as water, power and gas.The price is controlled strictly by government.Not a single bull stock can be found in Utilities except Hong Kong MTR.And the reason for HK MTR to stand out is the special permission from HK government, which allows buildings built over the metros up ground for business.Similarly as the newspapers, they cannot charge a 1$ paper for 2$, but only price up on ads for business.Vulnerable groups in raising price include bicycles and low-grade watches, the extent of increase in price has fallen far behind the extent of inflation during last 30 years.That’s not the worst! Vehicle, household appliance, computers, cells, phone charges etc. they have been marking down.

2. Ceiling of market capacity:

It’s easy to understand too, the volume of products is limited.Even if there are millions of travelers, the volume of highways, tunnels, bridges is limited as well as famous scenic spots of mountains, waters or towers. You could never wager on these stocks and dream of bull stock harvest with several dozen times increase in dozens of years.Neither does the department store nor restaurant at good location, unless they develop into chain stores.

3. Ceiling of output:

Capacity of output for some enterprises is equal to the material reserve, it’s fixed unless incorporation.Known as an investor who never likes mining stocks, Buffett said: “I could never dare to imagine that a mine becomes into a huge empty hole after mining for dozens of years.”Oil, coal die out, same as gold and silver, other than the precious & permanent creation of human.Of course, this can only be a problem for extra-long investors.Most industries with a bottleneck are restricted on raw material during our limited investing life.Examples can be many.

4. Ceiling of demand:

There are two cases.Case one, there is little demand. Just like an old Chinese fable describes, someone learned the skill of killing dragons but could not find A dragon.Many high-grade prescription drugs make less money as opposed to OTC drugs, this is why.As people say, one who sells atomic bombs is not as good as who sells boiled eggs.Many leading enterprises in sub-market are not good for long term investment.Case two is that demand disappears. This is very deadly, named as “sunset ceiling”.Just recall that people no more go to bowling, black-and-white and color film abandoned in a sudden, beepers disappeared and 40 thousand staff lost job because of tax reform on toll of road, anyone of these can make long term investors shudder!Natural economic selection brings about new products and service, also kills part of them.Austrian economist Joseph Alois Schumpeter has reminded us to be aware of the change in demand and industry in his “creative destruction”,which also make people always awe high-tech industry.

5. Ceiling of growth:

Aka dinosaur ceiling,which means enterprises enlarge too much.Some enterprises become big mac in the industry and naturally replace the whole industry.For example, a company has occupied more than 70% market share in container industry worldwide, another company more than 90% market share in harbor handling equipment, then became an old man in growth.

Lack of stamina, lack of market space.Corporate Strategy Committee of US has studied the enterprises in World 50 and discovered that 90% of them grew 3-4% compared to how much they had done after riding in World 50.They must rely on acquisitions to maintain high growth.

Compare to short term, the risk for long term investment is cost of time.A little mistake can be found in 10 years with unmaking-up loss.So you have to be cautious in selecting the stocks.I did a several-year investment in utilities, whose return always embarrassed myself.

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