The story for the stock 3 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Peter Lynch has advocated buying stocks whose business story and growth potential can be summarised easily in a few sentences. In fact, he is against buying stocks for which one cannot do so. It is excellent advice which I have found many times to be very insightful.

To me, it is important to keep track of the industry trends within which my purchased company operates, for how else can one make good judgments on how the stock is likely to perform, or what future trends to buy into? However, if one holds quite a number of stocks, it becomes quite a challenge to keep track of the news surrounding each single one. This is where being able to concisely summarise the reason for buying the stock becomes a useful tool; it sharpens one's focus towards tracking whether the reason for buying the stock is still valid. For example, if you bought into a plastics stock because "it is becoming an integrated manufacturing player--- a likely preference for future outsourcing by customers who want one-stop solutions" then oil prices should not be aggressively tracked; instead the focal point should be whether total solutions providers are really what MNCs are willing to pay a premium for. My point is, one only have a certain number of hours in a day to do a bit of research, and he should try to make it as relevant as possible by having a clear idea what to look out for. In this aspect, having a concise story about the stock helps in the news tracking process.

Another reason is that if one can filter down the stock to a concise story, it could well be a trading theme that will evolve in the near future. The market is not about rocket science; rather it is about two things: long-term trends which everybody seems to know but somehow does not act on; and people's emotions which tend to overvalue or undervalue stocks when the trends are finally recognised. Such trends can often be succintly expressed, and yet powerful in their impact: a rising China, need for oil, need for oil-drilling infrastructure, the water story, etc. If one understands the essence of the stock, he might even do some lateral thinking and look to uncover other potential ones which might capture the underlying theme better.

Now, I always carry a single simple idea about every stock that I hold which I regularly cross-check with whatever that I read. It clarifies things much better and I find it helps me think more long-term too; a useful modifier to my impatient nature.