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Investing in Stock Market Leaders

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I always root for the underdog. However, when investing in stocks this is not always a good strategy.

It may be emotionally attractive to hope the small, unknown company slays the bloated giant and takes over market leadership. In the real world, it doesn’t work that way.

Certainly, market giants fall, but they are seldom “slain” by the smaller competitors. In most cases, they do themselves in by failing to adapt to new market conditions, competitors, technology and so on.

More Risky

There are times when investing in emerging market leaders makes sense, but it is always more risky than staying with the market leader.

If you are looking for stocks that you can reasonable count on being market leaders for some time in the future, you should consider those companies that completely dominate their particular industry segment.

A good example is Wal-Mart (WMT) – the biggest company in retailing by far. There is no competitor even close to Wal-Mart’s size or market share. The cost to match it store for store would be staggering.

It is unlikely that any competitor or any two competitors together will topple Wal-Mart from its perch.

No Endorsement

I am not endorsing Wal-Mart as an investment candidate, however it is an example of a company that is in an unassailable position.

Another obvious example is Microsoft with its software on 95% of the personal computers. There are others, but the idea is these companies will fail not because of small competitors, but because they did not adapt to changes in the market.

However, you have to be careful when looking at market leaders as investment candidates, because they are, by definition, in a premium position and their stock price may reflect that.

Even market leaders can have volatile stock prices, so you still need to watch price trends and decide where you think a reasonable entry point is.

Conclusion

Investing in market leaders means betting on the long-term that the company has such a dominate advantage it will flourish for years to come. However, don’t go to sleep after investing in these leaders, because you may find they have done the same and fallen from glory.

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