Play the Six Degrees of Making Bacon
By HILARY KRAMER, AOL MONEY COACH
TREND TIP 1
The Ripple Effect of Trends
Most people are familiar with the party game Six Degrees of Kevin Bacon: "I'm friends with Sally who has a cousin who designs sets for a director who works with Kevin Bacon." The point of the game is to link any person to Kevin Bacon through six steps or less, and it illustrates the larger "Six Degrees of Separation" theory that every person in the world is only six contacts away from knowing every other person in the world.
I have made millions by making a different set of connections and connecting the dots to an overlooked pot of gold. One of my most valuable techniques for picking stocks is to look for the "unlikely suspects." These are the companies that thrive as a supplier or the ancillary beneficiary of a trend, societal change, or economic or political driver.
The Ripple Effect of Trends
Most people are familiar with the party game Six Degrees of Kevin Bacon: "I'm friends with Sally who has a cousin who designs sets for a director who works with Kevin Bacon." The point of the game is to link any person to Kevin Bacon through six steps or less, and it illustrates the larger "Six Degrees of Separation" theory that every person in the world is only six contacts away from knowing every other person in the world.
I have made millions by making a different set of connections and connecting the dots to an overlooked pot of gold. One of my most valuable techniques for picking stocks is to look for the "unlikely suspects." These are the companies that thrive as a supplier or the ancillary beneficiary of a trend, societal change, or economic or political driver.
While social scientists have studied how we as people are interconnected, little research has been dedicated to the significance of the relationship chain in financial trends. Economists have drawn up complicated equations for many economic models, but how an obvious trend causes other trends is relatively uncharted territory for even the professional investor. As a result, mapping out causal connections in trends might be one of the best kept secrets to identifying and profiting from these trends. The party game's goal is getting to Kevin Bacon in six steps. In financial trend spotting, finding a service or product that's separated -- whether by two, three, or six steps -- from a clear trend can lead to a great investment. For that matter, identifying a company even farther separated, whether 10, 15, or 20 degrees, can sometimes be profitable.
The best part is that it isn't rocket science.
Take the case of corn ethanol. With the rapidly growing interest in ethanol as a more environmentally friendly substitute for gasoline in the last few years, corn prices have skyrocketed. Many investors have jumped to make money off this trend. By now, the prices of corn have already jumped, leaving less potential to profit off the trend. Rather than trying to get in on something that has already become highly valued, you can make better money by applying the Six Degrees of Making Bacon principle, and investing in more affordable options that will benefit from the newfound popularity of corn. While everyone and their brother will be investing in the trend itself, you'll be surprised how many people don't think to invest beyond the trend.
If demand for corn has risen dramatically, farmers are going to be trying to meet that demand. What products or services do they need in order to increase production of corn? For one, they're going to be buying new tractors and other farming equipment, as well as more pesticides and fertilizer. So you might want to look at companies like AGCO Corporation or John Deere, which make tractors, combines, sprayers, and other equipment. Or check out companies like Monsanto, which produces Roundup, a pesticide often used on corn and soybeans (another source of biofuels). Syngenta is another example: among other things, they develop high-performing seeds, including corn seed, and are creating a hybrid corn specifically for improved biofuel. Then there are middlemen like Archer Daniels Midland, which stores, transports, and processes agricultural products, as well as train manufacturers like American Railcar, which makes and services trains used to carry agricultural products. The list could go on and on. . . .
During the housing boom, I invested in New Century Financial, which offers sub-prime residential loans. Sub-prime mortgages are high-risk. They are higher-rate mortgages offered to people with bad credit, and the majority of them come with an adjustable rate (they are often referred to as "ARMs"). As interest rates started to rise, I sold New Century, knowing that the increase would be worst for sub-prime borrowers, who tend to be poorer and who often are unable to shoulder the rise in their ARM. Sure enough, at the time of this writing, many of these people are defaulting on their sub-prime mortgages, and New Century has filed for bankruptcy. I'm glad I got out when I did.
In response to the housing boom, I also bought shares of the high-end retailer Restoration Hardware, which sports attractive--and overpriced--home furnishings and accessories. I also made money in Black & Decker, which was selling all those drills and saws to entrepreneurial contractors and do-it-yourselfers.
One of the great things about buying stocks that rise and fall with the housing market is that it's a way to "play" the real estate market, without having to spend the money (and take on the mortgage) for actual property. In the end, I made more money in the housing-boom market than most "house flippers" ever imagined -- all without ever buying a piece of real estate!
Excerpted from 'Ahead of the Curve' by Hilary Kramer. Copyright © 2007 by Hilary Kramer. Reprinted by permission of Free Press, a Division of Simon & Schuster, Inc.
The best part is that it isn't rocket science.
Take the case of corn ethanol. With the rapidly growing interest in ethanol as a more environmentally friendly substitute for gasoline in the last few years, corn prices have skyrocketed. Many investors have jumped to make money off this trend. By now, the prices of corn have already jumped, leaving less potential to profit off the trend. Rather than trying to get in on something that has already become highly valued, you can make better money by applying the Six Degrees of Making Bacon principle, and investing in more affordable options that will benefit from the newfound popularity of corn. While everyone and their brother will be investing in the trend itself, you'll be surprised how many people don't think to invest beyond the trend.
If demand for corn has risen dramatically, farmers are going to be trying to meet that demand. What products or services do they need in order to increase production of corn? For one, they're going to be buying new tractors and other farming equipment, as well as more pesticides and fertilizer. So you might want to look at companies like AGCO Corporation or John Deere, which make tractors, combines, sprayers, and other equipment. Or check out companies like Monsanto, which produces Roundup, a pesticide often used on corn and soybeans (another source of biofuels). Syngenta is another example: among other things, they develop high-performing seeds, including corn seed, and are creating a hybrid corn specifically for improved biofuel. Then there are middlemen like Archer Daniels Midland, which stores, transports, and processes agricultural products, as well as train manufacturers like American Railcar, which makes and services trains used to carry agricultural products. The list could go on and on. . . .
During the housing boom, I invested in New Century Financial, which offers sub-prime residential loans. Sub-prime mortgages are high-risk. They are higher-rate mortgages offered to people with bad credit, and the majority of them come with an adjustable rate (they are often referred to as "ARMs"). As interest rates started to rise, I sold New Century, knowing that the increase would be worst for sub-prime borrowers, who tend to be poorer and who often are unable to shoulder the rise in their ARM. Sure enough, at the time of this writing, many of these people are defaulting on their sub-prime mortgages, and New Century has filed for bankruptcy. I'm glad I got out when I did.
In response to the housing boom, I also bought shares of the high-end retailer Restoration Hardware, which sports attractive--and overpriced--home furnishings and accessories. I also made money in Black & Decker, which was selling all those drills and saws to entrepreneurial contractors and do-it-yourselfers.
One of the great things about buying stocks that rise and fall with the housing market is that it's a way to "play" the real estate market, without having to spend the money (and take on the mortgage) for actual property. In the end, I made more money in the housing-boom market than most "house flippers" ever imagined -- all without ever buying a piece of real estate!
Excerpted from 'Ahead of the Curve' by Hilary Kramer. Copyright © 2007 by Hilary Kramer. Reprinted by permission of Free Press, a Division of Simon & Schuster, Inc.
