Thursday, August 16, 2012

Investing in 'new age' sectors can be dangerous!

"What industry will be the next growth driver in the 21st century and what do you see that supports that? " legendary value investor Warren Buffett was once asked. Can you guess what answer he must have given? He simply said, "We don't worry too much about that." He went on to elaborate with the example of the automobile and the airplane industry. It was impossible back in the 1930s how much these two industries would impact the world. They have indeed been a great boon for society. However, for investors both these sectors have been absolute disasters. Of the 2,000 automobile companies that had mushroomed during that period, only a handful have survived. The fate of the airline industry has been even worse, with perpetual losses of billions of dollars.

The fate of a much-touted emerging sector has reaffirmed that Mr Buffett's wisdom has no expiry date. We are referring to the solar energy equipment sector. It goes without doubt that the world has little choice but to gradually switch towards sustainable and renewable energy sources. And solar energy is definitely a sector with very high potential. But does a high growth sector necessary translate into shareholder wealth? In this case, the answer seems to be no.

The global solar photovoltaic demand surged from a little over 7,000 megawatts (MW) to nearly 20,000 MW in 2010. And as per certain estimates, the current global demand stands at about 30,000 MW. But you would be surprised to know that the Indian solar manufacturing sector is on the verge of collapse with over 80% of the units shut down. In fact, not just India, the sector is facing severe headwinds across the globe. What's the reason? The answer is extreme optimism. Currently, the manufacturing capacity is two times the demand. Over enthusiasm about the industry's high growth prospects led players to set up huge capacities. But in recent times, the sector has been facing the brunt of the crisis in the Eurozone, one of the main markets. Dormant demand in India coupled with intense competition from Chinese counterparts made matters only worse.

Whatever be the fate of the solar equipment manufacturing industry, there is one very crucial lesson that investors need to take home. Be very careful while putting your money in the so-called 'new age' sectors purely on basis of huge growth potential. At best, avoid investing in sectors that do not have a sufficiently long operating history. Another important lesson is to let go of the urge to predict the future. Stick to the basic of value investing. Invest in stocks with strong fundamentals, solid past track record and sufficient future growth visibility.

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