The last lesson focused on New and Improved processes and products – as an investor, you really want companies that are not afraid to innovate, because successful innovation means growth. Take a look at the company’s press releases and Investor Relations for hints on how much each competitor is investing in innovation.

You can also use the company’s financial statements as a “cheat sheet” – the Income Statement usually includes a specific line-item for Research and Development as an operating expense. Companies that invest more of their total operating budget on R&D are focusing more of their efforts on innovation. Be careful with this method though – just because they invest in innovation does not mean the investment will pay off. You will need to use your judgement to guess at which company’s recent product or process announcements is more likely to pay off in the long-term.

But remember that your goal is diversification on both fronts – and the stock market is not always a zero-sum game. “Industry Trends” are when an entire industry is poised for growth, and (as a whole) that market grows. Think of a housing boom – when many people are buying houses, companies who build construction equipment, mix cement, develop property, sell lumber, and sell glass for windows will all start to do well. This means that if you are trying to decide between Caterpillar (CAT) and Deer & Company (DE) as your investment in construction equipment, you might be missing the big picture – buying a bit of both would keep your portfolio more diversified and help capture more of the industry trend.

Then, over time as the housing boom starts to cool off, you can evaluate both companies and decide which position you might want to start selling off in order to increase your position in a different industry. When the “Industry Trend” is growth, there is not necessarily a “winner” or “loser” to worry about.