|The Five Rules For Successful Stock Investing. Morningstars Guide To Building Wealth And Winning in the Stock Market Pat Dorsey, Wiley, Sons pdf|
These aren't the only four areas of the market with worthwhile investments— I've highlighted these because they contain so many wide-moat companies. There are great firms in even the least likely areas of the stock market.
You may want to read the next 13 chapters straight through, or you might want to use them as a reference guide the next time you find yourself analyzing a company in a specific area of the market. However you use these chapters, our goal in writing this section of the book is to help you answer a few essential questions: How do companies in this industry make money? How can they create economic moats? What quirks does this industry have that an investor should know about? How can you separate successful from unsuccessful firms in each industry? What pitfalls should you watch out for?
Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises. The next section of the book should give you a jumpstart in compiling that mental database, and that will make you a better investor.
Most people could survive without gourmet coffee or the latest DVD player, but health care is one of the few areas of the economy that's directly linked to human survival. New medical innovations can significantly improve or extend patients' lives. The vital importance of health care—combined with the relatively free regulatory environment in the United States —gives this sector the potential for above-average financial returns. Many areas in the health care sector are dominated by a few big players that don't need to compete on price. As a result, health care companies are often highly profitable, with strong free cash flow and returns on capital.
Health care has also benefited from powerful growth trends. Between 19S0 and 2OO2, total health care spending increased from 9 percent of the total U.S. economy to almost 15 percent. Although this growth rate may slow, the Cen ters for Medicare and Medicaid, which tracks health care statistics for the gov ernment, still estimates 5 percent annual growth in health spending over the next decade versus 3 percent growth for the economy. If this forecast holds true, health care will make up 18 percent of the U.S. economy in 10 years.
Health care firms benefit from consistent demand, as well. Even when the economy is in the tank, people still get sick and need doctors and hospitals. As a result, the health care sector has traditionally been a defensive safe haven.
The health care sector includes drug companies, biotechs, medical de vice firms, and health care service organizations. Of all these areas, we think drug companies and medical devices firms are usually the most promising because they typically have the widest economic moats. However, investors often get swept away by these companies' heady growth rates, so valuations can be steep.
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