Prof Elroy Dimson/ Cambridge Judge Business School
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 Elroy Dimson advises caution, citing as an example automobiles at
the start of the last century.
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.
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
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
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.
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.
Thank you, as ever, to Professor Dimson, for those insights — and to you, for watching.
Until next time, goodbye.