My opinion is, “invest in what you know”. If you are not aware of the business sector where you invested in, then you might lose your money. To understand it clearly, let’s assume I am a farmer and you are a doctor. We both are interested to invest in the stock market but have no prior information or knowledge on stocks. So, we discussed it with the people we trust. Someone suggested me that pharmacy stock is rising and will do better in the future. So, I decided to invest in the pharmacy sector. On the other hand, investor decided to invest in the commodity market in agriculture sector based on trending news which seems quite appealing to invest in. What do you think would happen next? Stating the obvious but both of us will get below average returns. You know why? It is because you are a doctor who has knowledge of the pharmacy sectors and knows which medicines will work on patients. Despite, you invested in the commodity market. On the other hand, I as a farmer who knows which Agri-crops come in winter or summer and what is the value of crops, grains, and other Agri-commodities invested in the pharmacy sector. If we had invested in what we know, it's most likely to get a good return on our investments.
Hmm, this is a little over simplified. If one is an individual investor that is managing their own portfolio they should not limit themselves to one sector. It is solid advice to pay attention to what you know and perhaps build a small base of long term stock on that concept but actually pulling returns out of the market, that won't work. It's a form of putting all your eggs in one basket. Sectors rotate in strength within the main index. In the US market the S&P 500 is the major index that can track the sectors the best. As the economic conditions rotate from strength to weakness the sectors performance changes with it. By rotating investments into strong sectors and out of weak sectors one can build a decent return.
I agree with @JerryM. Investing in only one sector is a recipe for disaster. It's best to have a diversified portfolio spanning multiple sectors so that when one gets hit with bad news/etc. it doesn't hurt as bad. Now if you feel strongly about a certain sector at the time, there's nothing wrong with having a higher weighted percentage of your portfolio in that sector, but you should never just put everything in one sector.
Gerald Loeb was a founding partner of E.F. Hutton, a renowned Wall Street trader and brokerage firm. The 1929 crash affected his investing style, making him skeptical of holding stocks for the long term; he was a contrarian. He wrote columns for Barons, The Wall Street Journal, and Investor Magazine. Forbes magazine called him "the most quoted man on Wall Street". He was the author of the classic financial text "The Battle for Investment Survival". The first edition came out in 1935 and he updated the book in 1957 and 1965. In the book, Loeb makes a strong case not to diversify, to only put one to five eggs in your basket and watch those eggs very closely. I strongly recommend this book. I have an older hardback but it is still available online.
Yes you might, but that's why you don't risk holding a loser long term like some deer in the headlights. I don't believe I need to know anything about the sector or company behind the casino ticket I'm buying. Money can be made not knowing a thing about them. In fact, as a retail investor, it is better for me to know nothing about the company, except that they make money and are a quality name. I'm not about to fool myself into thinking I know what goes on in the board rooms even if it is a business I'm intimately familiar with. Read the tape, follow the money and leave the fundamental stuff to the big money guys I say.
