Page 454 - How to Make Money in Stocks Trilogy

324 INVESTING LIKE A PROFESSIONAL

Why Track 197 Industry Groups?

Why does IBD divide securities into 197 industry groups rather than, say,
the smaller number of groups used by Standard & Poor’s? It’s simple really.
The stocks within a given sector do not all perform at the same rate. Even if
a sector is outperforming other sectors, there may be segments of that sec-
tor that are performing extremely well and others that are lagging the mar-
ket. It’s important that you be able to recognize what industry group within
the sector is acting the very best, since this knowledge can mean the differ-
ence between superior and mediocre results.
Early in our study of the market, we realized that many of the investment
services available at the time did not adequately dissect the market into
enough industry groups. It was therefore difficult to determine the specific
part of a group where the true leadership was. So we created our own indus-
try groups, breaking down the market into 197 different subcategories and
providing you, the investor, with more accurate and detailed insights into
the makeup of an industry. For example, the medical industry can be
divided into hospital companies, generic drugs, dental, home nursing,
genetics, biotech, and HMOs, plus a few other unique modern areas.

How You Can Decide Which Industry Groups
Are Leading the Market
When analyzing industries, we’ve found that some are so small that signs of
strength in the group may not be relevant. If there are only two small, thinly
traded companies within a subindustry, that’s not enough to consider them
a group. On the other hand, there are industries with too many companies,
such as chemicals and savings and loans. This excessive supply does not add
to these industries’ attractiveness, unless some extremely unusual changes
in industry conditions occur.
The 197 industry groups mentioned earlier can be found each business
day in Investor’s Business Daily. There we rank each subgroup according to
its six-month price performance so that you can easily determine which
industry subgroups are the true leaders. Buyers operating on the “underval-
ued” philosophy love to do their prospecting in the worst-ranked groups.
But analysis has shown that, on average, stocks in the top 50 or 100 groups
perform better than those in the bottom 100. To increase your odds of find-
ing a truly outstanding stock in an outstanding industry, concentrate on the
top 20 groups and avoid the bottom 20.
Both Investor’s Business Daily and the Daily Graphs Online charting ser-
vices offer an additional, proprietary source of information to help you