XYZ Corp has been going great guns because their new lemon scented frammis rod has twice the durability of the leading brand. And after it’s been going up for some time we decide to buy some shares. But then sales slow, they cut back on staffing and the stock drops. Finally after the stock has gone down 50% we dump that loser and look around for something else.
But then lo and behold 3 years later XYZ is on the rise again. Their neon doohickey is taking the world by storm. But we don’t just want to jump into it, we want to make sure this is a stock that has some running room. And it’s just doing better and better, so we decide to buy. But when we buy it, sure enough, the stock heads down and we get out with another loss.
What’s going on? Why can’t we catch a break? What you’re seeing here is just the product life cycle of a company. A company develops a new product, it catches on, sales rise and so does the stock. But most products have a limited life. And unless the company has a constant pipeline of innovative products, there is a good chance the stock will peak after awhile. It may take months or years before they develop the next big thing. And in the meantime, the stock could decline significantly.
This is just another version of buy low, sell high. If you have a company with a history of innovative new products, the time to buy is in the lull of the product life cycle. And the time to sell is when the whole world catches on. If you wait to buy until it’s a sure thing, it’s probably too late. Stocks can move very fast. The trick is a buy a company that has that history, and has the financial wherewithal to keep going until they have the next big thing.
When looking at buying a company’s stock always ask the question, what is the life cycle of their products, and where are we now? It’s tough to buy during those lulls. But that’s the time the real money can be made.