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Where to Look
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In THE PREVIOUS chapter, I discussed easy ways to home in on companies that "will be "worth your while. In the next section of the book, we'll focus on tools for understanding different areas of the stock market.

As I said in Chapter 3, it's easier for companies to make money in some industries than in others. Moreover, some industries lend themselves to the creation of economic moats more so than others, and these are the industries where you'll want to spend most of your time. Although we don't advocate a top-down investment strategy—in which you select areas of the market that you think "will perform better than others and invest heavily in your top-rated industries—the economics of some industries are superior to others. Hence, you should spend more time learning about attractive industries than unattractive ones.

Every industry has its own unique dynamics and set of jargon—and some industries (such as financial services) even have financial statements that look very different from the ones we discussed in Chapter 5. I asked Morningstar's staff of 30 equity analysts to put together a series of chapters covering just about every corner of the market. These chapters should help you wade through the different economics of each industry and understand how companies in each industry can create economic moats—which strategies "work and how you can identify companies pursuing those strategies.

Where to Look

Because you're likely as pressed for time as every other person with a day job who also manages his or her own investments, let me try to briefly steer you toward some areas of the market that are definitely worth more of your time.

Banks and Financial Services

In general, most financial services firms are in excellent economic positions as middlemen for money. Banks in particular enjoy the enviable position of paying very little to hold on to depositors' money (when you consider the low rates on checking accounts and all of the fee income that such accounts generate), which they then turn around and lend out at substantially higher interest rates than they're paying to depositors. In fact, some banks do so well at levying fees and cross-selling financial products that depositors literally pay the bank to hold their money. Moreover, because banks have somewhat confusing financial statements, many investors simply pass them by or look at only the biggest and most well-known firms. By learning "what makes banks and other financial services firms tick, you'll be ahead of most investors, and because this ground is less picked-over, you'll likely find some solid investment ideas as well. (Financial services is such a broad area of the market that we've devoted two chapters to the area—one on banks and one on asset man­agers and insurance companies.)

Business Services

This is the ultimate catchall area of the market, so many investors pass it by. That's a shame because it contains some very attractive firms. In addition to larger industries such as data processing—which is boring but profitable as can be—business services is packed with niche firms that dominate their corner of the economy. Cintas, for example, has generated an enormous amount of shareholder wealth by convincing companies that it can design and main­tain employee uniforms better than employers can. Who would have thought that renting uniforms could be so profitable? Moody's (which rates bonds) and Equifax (which maintains a credit-scoring database) are other examples of highly profitable but not-so-well-known firms with strong positions in niche industries.

Business services firms often fly beneath the market's radar because they don't fit neatly into the industry-oriented coverage lists of Wall Street analysts— there are usually only a few public companies in any one niche, so the industry specialists on Wall Street tend to pass them by. As a result, the stocks don't get hyped as much to institutional investors. (The other reason companies in this area tend to get less attention from Wall Street is that they're usually self- funding, which means they don't need many investment banking services.) Less attention from Wall Street can mean more opportunity for smart investors, so don't ignore business services.

Health Care

This area of the market is similar to financial services because the long-term demand outlook is very strong, and companies tend to be highly profitable. As our Biomet analysis in Chapter n showed, even smaller firms can build lasting economic moats. Tread carefully with biotechs and some managed- care firms, though. Most biotechs are single-product lottery tickets, and most managed-care firms are affected by truly arcane regulatory issues—seemingly minor changes in Medicare rules can have a huge impact.

Media

Finally, spend some time getting to know the media business. Many media companies build moats around themselves through natural oligopolies or monopolies—there's little demand for more than a couple of daily newspapers in any one city, for example. Moreover, media is one of the few industries in which product vendors are paid before they have to deliver anything, because a large amount of media is sold via subscription. Can you imagine getting paid on January I for the coming year's work? That's how many media firms make money.

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