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Why investors should not stock pick or rotate between different industries



Global diversification vs stock and sector investing: which approach offers the highest returns

Robin Powell: Hello there. We’re often hearing in the media about emerging industries that seem to offer exciting opportunities for investors. Right now, for instance, there’s plenty of discussion around driverless cars and 3D printing.

But how wise is it to invest heavily in these sorts of areas? Stock market historian Professor Elroy Dimson advises caution, citing as an example automobiles at the start of the last century.

Professor Elroy Dimson: Should you have invested in automobiles? Well, most people would have chosen the wrong automobile company - most of them went bankrupt. One of the problems with identifying winning sectors is that it’s extremely difficult to tell which ones will do well and which ones will do badly, especially if you’re a long-term investor.

RP: So, you shouldn’t get over-excited about emerging industries. Nor should you, according to Professor Dimson, avoid industries that appear to be on the decline.

ED: Railroads turn out to be overtaken in the middle of the 20th century by airlines and trucking, and also shipping. But by the time we’d passed through the bankruptcy of the American railroad system with the Penn Central collapse in the 1960s, if we ran all the way through to 2015, it turns out that the best-performing transportation industry was the railway system. So it can be the case that you buy into a tired industry, and one which appears to have fewer growth prospects, but if you buy at the right price, there may, in the end, be a worthwhile return

RP: The evidence then is clear. Whatever the forecasters might say, rotating between different sectors of the economy is a bad idea. The best policy is to stay widely diversified — not just across industries, but also different regions of the world.

ED: The story sounds as though it’s about diversifying across lots of different companies and lots of different sectors, but there are many countries, where the number of industry sectors is extremely small, three or fewer. And so in those cases, an attempt to diversify across industries itself is very difficult unless you diversify globally, so as soon as you think about diversifying across different types of companies, for the global investor, or for any investor that’s in a small market, you’re forced to think about investing internationally.

RP: Thank you, as ever, to Professor Dimson, for those insights — and to you, for watching.

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