This post is the second in our series: What can football teach you about stock investing? There are four positions in football: Goalkeepers, Defenders, Midfielders and Midfielders. It is easy to draw parallels between how they play different roles, but also work together as a team to score and prevent their opponents scoring goals. Stocks and companies have different characteristics. They perform differently in different situations. These differences must be understood and used to your advantage in order to create a portfolio that delivers healthy-high returns.
In this post, we will discuss companies that could play the Forwards role in your portfolio.
Who are Forwards?
Forwards are aggressive players who are often found at the front. They are responsible for scoring goals, but not defense. They wait for the ball and race towards their opponent’s goal. This role is played by portfolio companies that are high-growth. Their prices will rise quickly when the market and economy conditions are favorable. This is because companies that have a favorable economy are able to grow more quickly and produce a better performance. If the market is bullish, it tends price such stocks high. Stock prices rise quickly due to both earnings increases and the P/E multiple. They can have a very positive effect on your portfolio by generating high returns during these periods.
But, forwards are not required to play any role in defense. Forwards will wait until the ball is in their half before they move. Stock prices of these companies tend to drop sharply in difficult economic and market conditions. Market players place high expectations on companies’ performance, which is why they tend to set a higher price than they can match in difficult situations. These stocks’ prices tend to rise very quickly and sharply. This is when your portfolio starts to suffer. These losses can be devastating if Forwards make up a large portion of your portfolio. Even seasoned investors may not be able to take it. These stocks are often sold and even disposed of by investors. It may be at low prices that don’t yield them good returns.
What companies are considered forwards?
We typically include forward-looking companies that are in long-term growth sectors. It does not include companies that achieve high growth and high returns on capital. These companies have a long runway that is available for the following reasons.
- The products are not widely used.
- Demand is rapidly growing
- Companies expand geographically while focusing on the exports market
- Continuous innovation
- Market shifts for well-practised categories can be either unorganised or organized