In real estate, there is a common saying of "location, location, location." You can chant a similar mantra in investing: "sector, sector, sector." In other words, investors need to be in the right sector at the right time to enjoy the best gains. This means they have to anticipate where the economy is going to be in the near future and start positioning themselves to take advantage of the surge.
Hockey star Wayne Gretzky famously said, “I skate to where the puck is going, not where it has been.” The popular quote vividly illustrates something that everyone intuitively wants to do, but may not understand how. First, investors have to focus their energy on determining where the market could be headed in the future. Most investors are prone to buy or sell based on what has happened, or at best what is happening. Not enough thinking goes into projecting what is likely to happen next and be there when the "next big thing" happens.
Look at energy stocks. They are going through the roof. Oil and gas stocks have doubled, quadrupled or more. So have mining and other materials stocks. While there may still a lot of fuel left in energy stocks, the gains to be had are definitely less than what they could have been had investors taken the plunge in 2020, when the sector was dead and the Russian and the Saudi's started a price war and then Covid hit. Investors sold off energy stocks at such a speed one would think they were holding a live rattlesnake. With the benefit of hindsight, we now know that it was raining gold and they should have been shoveling it in.
Benjamin Graham prefaced his book, "The Intelligent Investor," with an incredible quote by the ancient roman philosopher Horace: "Many shall be restored that are now fallen, and many shall fall that are now in honor."
I think this is very applicable to sector investing. Value investing is delaying gratification via investing in stocks and sectors that are out of favor and then waiting until the market comes to recognize its value. Growth investing, on the other hand, involves identifying which stocks and sectors are growing revenue and earnings the most and jumping on the bandwagon (hopefully) early and then jumping off (hopefully not too late) when the sector or stock matures or falters. One big problem is the typical run-of-the-mill, Average Joe value investor is typically too early in getting on and too quick to get off, while his counterpart, the Average Joe growth investor, is too late to get on and off the bandwagon.
One way to be aware of where things have been and where they are going is being situationally aware. A great tool to that is available on GuruFocus is the Sector Performance Comparison Tool on the Overview of Market Industries page. Take a look a the health care sector in the following charts.
| Three-year annualized return | One-year annualized return | One-month annualized return |
 |  |  |
As illustrated above, health care has gone from the worst-performing sector for the three-year and one-year periods to the best-performing sector in the one-month chart. This tells me something has started to happen in this sector. Momentum is coming back to the space. The same thing can be said about communication services as well. A big reason is, of course, recession fears as these sectors tend to do well in difficult economic periods. Health care is a high priority even in a recession and most people are not going to give up their mobile phone or internet either, regardless of market conditions.
On a high level, this tells me that maybe I should start taking some chips off hot sectors like energy and materials, which may be peaking, and start putting them on emerging sectors such as health care and communication services. This does not have to be done immediately, but can be done gradually. It is counterintuitive to go from a winning sector to a middling one, so it may be easier to do it gradually rathern than suddenly. While precise timing is impossible to pin down, chances are good that 12 to 36 months from now, these sectors will be on top. Inflation is raging, the Federal Reserve is tightening and high energy prices will start to dampen consumer spending. The end of the current business cycle is nigh.
Some health care stocks I am interested in currently are Merck & Co. Inc. (MRK, Financial), Pfizer Inc. (PFE, Financial), Moderna Inc. (MRNA, Financial) and Walgreens Boots Alliance Inc. (WBA, Financial). I have also looked at telecom stocks like Verizon Communications Inc. (VZ, Financial), AT&T Inc. (T, Financial) and Comcast Corp. (CMCSA, Financial). It helps that they are cheap fundamentally and strong financially with little chance of going bust in a recession. I am betting these stocks will outperform the market in the next one to three years. In addition, most of them pay a nice dividend, which should keep investors cozy in the winter of a recession. I know it is difficult to make predictions, especially about the future. We are dealing with probabilities here, not certainties. It is all about putting probabilities on your side and then hoping for the best.
