100 Ways to Beat the Market #7: Avoid Hot Industries with No Barriers to Entry

A Lex column in yesterday’s Financial Times, “Solar: the sun also sets”, is yet another stark reminder that a growing industry does not necessarily make a good investment.

The solar panel industry is expanding rapidly as measured by worldwide megawatts of solar panel shipments. By that measure, business is up approximately sixteen fold in the past five years.

In stark contrast, solar energy stocks, as measured by the Mac Solar Energy Index, are badly trailing the S&P 500. The problem is overcapacity and cheap products coming out of China. One casualty, Evergreen Solar, just filed for bankruptcy protection.

Investors are easily enamored with hot industries with seemingly unlimited growth opportunities. However, in many cases, the businesses in these industries do not have any durable competitive advantages. Competitors pile in and drive margins into the ground.

Society may be the ultimate beneficiary if competition drives down prices far enough for solar power to compete with fossil fuels, particularly if it can be done without subsidies. Investors in this sector may not be so lucky.

Steer clear of hot industries with no barriers to entry. Don’t invest in a business without a moat. Pay attention to whether managers gets this and what steps they are taking to strengthen their hand. This may be the single most important factor if you are a long-term investor.

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6 thoughts on “100 Ways to Beat the Market #7: Avoid Hot Industries with No Barriers to Entry

  1. Chris

    Hey Greg,
    this is absolutley my point of view.
    The moat must be big enough and there shouldn`t be any subsidaries. That is exactly the kind of business I am interested in.

    Best wishes from Germany,

    Chris

    Reply
  2. Carvel

    I’m grateful for your focus on process, discipline and patience in this environment. I love reading your blog. Hope this eventually becomes a book–even if it must be self-published or an ebook, I will be the first to buy it!

    Reply
    1. Greg Speicher Post author

      Carvel, thanks for your comment. I am considering putting this out as a book or ebook when completed.

      Reply
      1. Tom

        I agree. And it is something that would sell to! You already have a good angle and title. 😉

        As usual I keep reading your new blog posts every day, keep up the good work!

        Reply

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