Invest for tomorrow’s return
There is an old saying when it comes to investing that you can’t buy yesterday’s returns.
In essence, this means that if an investment rises in the previous year and you don’t own it, then you missed out. That said, I believe it also means you can’t expect the return to be repeated in the following year.
Unfortunately, many investors attempt to buy yesterday’s returns by looking at the best performing sectors or stocks that have already performed, and invest in the hope they will achieve that return or better in the future. But this is exactly the opposite of what they should be doing, which is echoed in Warren Buffet's statement that investors should buy in doom and sell in boom.
In essence, Buffett is telling us to buy assets that have been performing poorly and to sell what has been rising strongly.
Given this, investors should be looking to invest for tomorrow’s return, which you can do by following the money flow. For example, in 2020 the Information Technology sector has risen the most, as it is up 40 per cent since 1 January, while the Energy sector has fallen 40 per cent over the same period.
Right now, there is an influx of investors buying technology stocks believing the big run in this sector will continue, but if we follow Buffet’s advice, we should be looking for opportunities in the Energy sector.
That said, I could understand an investor's reluctance to buy into an Energy stock like Whitehaven Coal, which is down almost 60 per cent this year, while Afterpay (in the Technology sector) is up over 200 per cent.
As such, I am not recommending that people just sell their Technology stocks to buy Energy stocks and I am sure Buffet would not be suggesting this either. But if you are looking for stocks to buy, then look at the sectors that have been moving down, as this is where you will most often find the greatest opportunities.
Remember what goes up must come down and vice versa, so it is possible to buy tomorrow's returns if you are watching the money flow.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au