How to invest in the stock market
There’s an old joke about airlines that goes something like this:
Q: How do you make a small fortune in the airlines?
A: Start with a large fortune!
The general rule of thumb in any competitive business: If there’s a profit to be made, someone with much deeper pockets is probably already trying to get in on the action. That’s one reason Southwest Airlines is one of a few generally profitable standouts in the airline business, despite being known for its low prices. Its balance sheet, touting more cash and short-term investments than long-term debt, is exceptionally strong for its industry. The lack of a heavy debt anchor allows it to charge less than its competitors for essentially the same service. As a result, it has thrived in an industry where players such as Northwest (NYSE: NWA) regularly flirt with bankruptcy and surviving firms like SkyWest (Nasdaq: SKYW) and Pinnacle Airlines (Nasdaq: PNCL) struggle with the impact of those bankruptcies on their own businesses.
Not just an airline problem
The same rule of deep pockets chasing profits applies to just about any industry. The most vulnerable companies, much like the airlines, suffer from an ugly combination of high capital costs and relatively light non-financial barriers to entry. Read the rest of this entry »
