Chapter 4: Sector and Industry Analysis
What is a industry trend
An industry trend is a pattern or direction of change that a particular industry follows over time. These trends can involve shifts in consumer preferences, technological advancements, regulatory changes, or economic factors that impact how businesses within the industry operate and grow.
For example, a current industry trend in the automotive sector is the shift towards electric vehicles (EVs). This trend is driven by increasing environmental awareness, government regulations, and advancements in battery technology. Companies that adapt to this trend by developing EVs and related technologies are likely to perform better in the future compared to those sticking solely with traditional gasoline-powered cars.
Foreseeing a trend
Foreseeing trends with absolute certainty is basically impossible, but you can often deduce with some accuracy if a trend will affect the stock market.
Trends that impact the stock market usually involve industry shifts, potential margin increases, ROI increases, or any factors that significantly improve a business's operations. Ask yourself if this trend has the ability to make the business better.
For example, Nvidia benefits greatly from the AI trend. Increased demand for their chips boosts their profitability, while the companies purchasing these chips also benefit by becoming more efficient with AI handling some of their work. These "win-win" trends, where both the provider and the user of a new technology or service see improvements, can often be the most profitable.
When can it be usefull
We want to start by saying that we don't recommend trend investing. Instead, focus on investing in good companies rather than chasing trends. However, understanding trends can be useful for a couple of reasons. Firstly, it helps explain performance, which can be reassuring psychologically as an investor. Secondly, observing how a company's management adapts to trends can provide insight into their ability to navigate industry shifts. If they successfully leverage current trends, it likely indicates they will be adept at adapting to future industry changes and market conditions, showcasing strong leadership and strategic vision.