The pitfalls of avoiding trend investing, learn about it!

Trend investing can generate attractive returns, but there is one condition: it needs to be invested when no one is paying attention, or when everyone is avoiding such assets.

Even if you discover an obvious trend, if other investors have already gone all-in on this opportunity, your returns will still be affected.

This is exactly what happened to all investors in a sector last year.

In the following, I will share what happened in that sector, what we can learn from it, and how to avoid this trap.

The story behind an obvious major trend is always intriguing, especially one that will undoubtedly change our lives in the coming decades.

Investors who are betting on this investment theme are generally right in the big picture. The sector they are flocking to is highly likely to take off in the coming years. However, this does not change the basic principle of investment: if the timing is wrong, you will still suffer huge losses.

The sector we are discussing today is the clean energy sector.

Investor enthusiasm for clean energy was high in 2020. Ford Motor released the all-electric Mustang Mach-E, shifting from its signature muscle cars to electric vehicles. That same year, General Motors also introduced a pure electric SUV. Honda plans to launch a pure electric SUV called the Honda Prologue in 2024.

In addition to the companies mentioned above, Jaguar, Cadillac, Volvo, and other car brands plan to produce only electric vehicles by 2030.

It's not just car companies that are driving the development of clean energy. Countries like the United States, Australia, China, and others have announced plans to gradually phase out fossil fuels and invest in clean energy, including solar, wind, and hydroelectric power.

Governments and major companies worldwide are paying attention to clean energy. Clean energy is undoubtedly the direction of future development, and this major trend will take off in the coming decades.

The problem is, everyone sees this major trend and they are trading in large numbers. The graph below shows the changes in the circulating shares of the WilderHill Clean Energy ETF-Invesco (PBW).

PBW holds a basket of clean energy stocks, and as an ETF (exchange-traded fund), PBW reflects how investors view the entire sector.

Because ETFs like PBW can increase or liquidate shares according to investor demand, if investors are very interested in clean energy, PBW will issue more shares to meet the new demand.

This situation occurred in 2020, and the number of PBW shares surged several times last year, after people had neglected this sector for many years.

When investors favor an asset, this kind of situation arises. They keep buying, regardless of the price, and they usually enter near the peak of an uptrend.

This type of trading is feasible for a period of time - in 2020, PBW soared by about 200%, but after peaking in February 2021, PBW has dropped by over 50%. Please see the graph below:

However, this sharp decline does not mean that the major trend has ended, nor does it mean that clean energy has been sentenced to death.

It simply shows that no matter how big the major trend is, it cannot ensure the survival of your investments in the midst of fervor. Buying in when everyone else is excited is very likely to result in losses.

There will eventually be a reversal in clean energy concept stocks, but the overall trend driving their development has not changed. However, before you consider entering, you should wait for emotions to cool down and for the trend to reverse.

Most importantly, as an investor, you should avoid extremely excited markets, which may seem like a sure thing but can result in huge losses.

(The views expressed in this article are solely the author's personal views and should not be considered as investment advice. Investing carries risks, and entering the market should be done cautiously).

Analyst: Chris Igou

Compiled by: Samantha