9 Sectors to Learn
When you start investing in the stock market, and start to have a little bit of success, everyone always seems to ask, “what is the best stock to buy right now?” Not an unreasonable question, but there’s actually a much better question to ask.
If you want to be an astute investor, observe and learn how different sectors trade. Learning how to pick the best sectors first, and then the best stocks within those sectors, is the difference between getting rich and getting filthy rich.
You don’t have to go full landlord in order to invest in real estate. For newer investors, buying actual properties can be overwhelming. Real estate investment trusts (REITs) are a great way to get exposure to real estate as simply as buying stocks. When your peers are complaining about the rent being too high, that’s exactly when you should be looking at REITs.
The healthcare sector has quietly made many millionaires over the years. Not only are these stocks immune to recessions, they actually tend to trade higher during periods of uncertainty as investors look for relatively safer places to park their money. Find a healthcare stock with a clean balance sheet and you can achieve consistent growth for decades.
The financial sector tends to trade a little bit differently than anything else. You can analyze most stocks by looking at the Price to Earnings ratio, but the best metric to analyze financials is called the Price to Book ratio. Look for banks that have a low Price to Book ratio, and then among those find one that has a catalyst that will push the stock higher. The only way to find those catalysts is to listen to the quarterly conference call. It’s an extra step few people put the effort into doing.
I know there isn’t anything sexy or exciting about a boring old trucking or rail company, but these more than anything are the kinds of companies that turned Warren Buffett from a Nebraska grain mill operator into at one time the wealthiest person in the world. There's a lesson there. These stocks are like the Tortoise in Aesop’s famous fable.
Technology stocks are a finicky bunch. They can trade at spectacularly high P/E ratios with the promise of ground breaking new products at some point in the future. Sometimes they deliver, sometimes they don’t. It’s very easy to get caught up in these stocks if you were on the outside looking at Tesla’s meteoric rise in the summer of 2020. Keep in mind Apple came within a hair of bankruptcy in the 1990s. It’s almost always a good idea for everyone, especially young people, to own several of these stocks, but make sure you are doing your homework. Don’t just read the memes of Insta millionaires, you actually have to listen to or read the transcripts from the quarterly conference calls.
Often when people start investing, an armchair expert will advise them to ponder the question, “What is your risk tolerance?” That’s actually about the most bush league question an advisor can ask. A much better question to ask is, “Are you getting paid appropriately for the risk you are taking?” If you have too many tech stocks in your portfolio, the answer is going to be a solid No. If you don’t believe me, go read the Wikipedia article on JDS Uniphase.
Have you ever worked at a retail job? Maybe a cashier or shelf stocker or something? Many people have at one point or another, and if you did you were probably grossly overworked and underpaid. No one in retail makes any money except the owners. They make tons. Whenever you hear your friends talking about their favorite places to shop, make a mental note to check out their stocks later.
Look for trends in retail. A great example is Costco in 2020. They were the first retail store that mandated masks for everyone in their stores when the pandemic started. What you personally think about masks is entirely irrelevant. What is relevant is that people flocked to Costco in droves because they felt safer there. If you noticed that and acted on it, 2020 wasn’t an all bad year for you. In fact you didn’t even have to notice it, the CEO literally told everyone what was happening there on an earnings call BEFORE the stock started moving up.
Energy stocks can make or break a portfolio. These companies can be enormously profitable. If you have ever filled up your gas tank, you know what I am talking about, but these companies also have spectacularly high expenses on things like machinery, labor, research, infrastructure, taxes and permits. Geopolitical issues can cause problems as well. These are not the kinds of stocks you can buy and forget about.
One potential pitfall with energy stocks to look out for, many fund managers and investors are very cognizant of ESG, or Environmental, Social, and Governance, investing. They don’t want to own stocks they perceive are bad for the environment such as oil companies. Just like with masks at Costco, your opinion is not relevant. Just be aware ESG trends can make these stocks do strange things.
These stocks fluctuate in the most predictable way. They follow the overall trends in the economy to a T. More than any other sector, remember the most basic principle of buying low and selling high. When you hear politicians saying words like “shut down” or “recession”, that’s your opportunity to buy these stocks at a discount. Later on when they start saying words like “infrastructure” or “stimulus”, that’s your opportunity to lock in your well deserved profits by selling high. It’s easy to get caught up in emotion and do the opposite.
Media stocks may be some of the most difficult to analyze and trade, but many of them have vastly outperformed the overall market in the last twenty years, and many will continue to do so for the foreseeable future. Netflix is the poster child for this new breed of high flying media stocks, along with the company formerly known as Facebook, now called Meta. The media industry is very dynamic because trends, by definition, come and go, and the media that people consume goes in and out of style very quickly.
What sectors are you most interested in investing in? Pick five of these to learn more about and become an expert. Then from those five, pick the best stock out of each of those five sectors. You will be the owner of a well diversified portfolio of stocks that will make you very wealthy someday.