ADVERTORIAL FEATURE Baillie G
Virtuous cycles
The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk .
‘ If it bleeds , it leads ,’ or so the old newspaper adage goes . Editors put bad news on their front pages because they know it sells . Yet headlines don ’ t always tell the full story . Dig deeper into a tale and you ’ ll find a richer , more nuanced perspective . Digging behind the headlines is an important part of our role at Monks . We love to find companies that have the potential for structural growth but are being plagued by bad news . This may come and go , but if a company has a big competitive advantage then it will be durable , allowing the firm to grow again long after this morning ’ s newspapers have become tonight ’ s fish and chip wrappers .
We call these companies cyclical growth stocks . They tend to take three steps forward and one step back . If you study the companies that generated most of the stock market value over the past 50 years , then they fall into three broad categories . After a ‘ rapid ’ growth phase , many mature into either ‘ stalwarts ’ or ‘ cyclicals ’. Stalwarts are the compounding machines – with each year ’ s growth building on the previous year ’ s – that we expect will increase their value at more than 10 per cent each year . Conversely , cyclicals require a bit more leg work to find the full story . These are stocks that face short-term challenges but – if picked wisely – have the potential to grow over the long term . For cyclicals , the supply cycle is crucial . We look for companies in industries facing a bottleneck , where there isn ’ t enough supply to meet demand . If the economy picks up and there ’ s a rapid increase in demand then , all of a sudden , a resource that was previously abundant becomes scarce . Competitors can ’ t cope , there ’ s a scramble , and prices suddenly shoot up . While stalwarts ’ strong foundations mean they continue growing steadily , cyclicals deliver a double whammy : their foundations improve and their
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