One of the most bizarre behaviour in the stock market is herd mentality. It’s a bit like fashion. Investing trends can be in vogue one minute, and about as welcome as flatulence in a spacesuit the next.
As with fashion, it would take a brave person to head into the office wearing a psychedelic shirt, kipper tie and loon pants. You can give it a go if you want. But chances are you could find yourself dining on your own at lunch time in the food court.
In a similar way, investors like to buy what is hot today, and ditch what is not. And hot is defined as what everyone else is buying….
…. Those who had bought into stay-at-home stocks and tech shares should have done fabulously well during COVID-19. But those who owned bank, hospitality, office REITs, and oil shares could be licking their wounds.
But here’s the thing. Traders will favour one sector for a while. Then they will drop it like a hot potato and move onto another sector. In other words, the market rotates in and out of sectors at different times.
Time will tell
Unfortunately, there is no way of knowing how long a sector can remain in favour. It could be weeks, months or even years.
Thing is stock rotation is just another name for market timing. And as investors, we should resist the urge to time the market. It can be music to the ears of brokers who thrive on investors switching from one stock to another or from one sector to another at a whim.
However, it takes guts to buy into sectors that the market hates. That said, buying shares in wonderful companies at fair prices is one of the best ways to make money from the stock market over the long term.
We could find these wonderful companies in unloved sectors. We could even find them in sectors that are already doing well. In the end, it is valuation that matters.
These stocks can be the best places to watch our money grow over the long term. That being the case, why on earth would we ever want to jump in and out of them?
So, could banks, hospitality, office REITs, and oil shares see a change in fortune next year? It’s possible. But even if they didn’t, good dividend-paying shares are always worth holding, even if they are out of favour.
As Warren Buffett said: “Since the basic game of investing is so favorable, Charlie Munger and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity.”
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Disclosure: David Kuo does not own shares in any of the companies mentioned.