How to Lose Money in an Obvious Megatrend

Investing in a megatrend can lead to huge gains. But there's one condition...

You need to invest when nobody's paying attention... or when everyone is avoiding the asset you want to buy.

Even if you've found an obvious megatrend, your returns can still suffer if investors are already all-in on the idea.

That's exactly what happened to anyone who invested in one sector last year.

Today, I'll share what happened... what we can learn from it... and how you can avoid this pitfall.

The story behind a powerful megatrend is always appealing. I'm talking about the kind of investment theme that's bound to transform our lives in the decades to come.

The folks who took this beating got the big picture right...

The sector they piled into will take off in the coming years – it's inevitable. But that doesn't change this basic principle of investing... Get the timing wrong, and you'll suffer big losses.

In this case, we're talking about clean-energy stocks.

In 2020, the investor hype for clean energy was huge. Ford Motor had released its all-electric Mustang Mach-E... turning its most iconic muscle car into an electric vehicle ("EV"). General Motors unveiled a fully electric SUV that year, too. And Honda has plans to launch one in 2024 with its Honda Prologue.

And these companies aren't alone... Jaguar, Cadillac, Volvo, and other brands are planning to exclusively manufacture EVs by 2030.

It's not just the car companies pushing for clean energy, either...

The U.S., Australia, China, and other countries have all announced plans to phase out fossil fuels and rely on clean energy. This includes investments in solar, wind, and hydropower.

With world governments and major corporations alike getting on board with this story, there's no question that clean energy is the way of the future. This megatrend will take off in the coming decades.

The problem is that everyone saw it happening. And they crowded into the trade. Just take a look at the chart below. It shows the change in shares outstanding for the Invesco WilderHill Clean Energy Fund (PBW)...

PBW holds a basket of clean-energy stocks. And because of its structure as an exchange-traded fund ("ETF"), it also tells us how investors feel about the sector as a whole.

That's because ETFs like PBW can create or liquidate shares based on investor demand. If investors are excited about clean energy, PBW creates more shares to meet new demand.

We saw this in 2020. PBW's share count soared hundreds of percent that year... And that's after years of little interest in the space.

This is what it looks like when investors are falling in love with an asset. They buy and buy and buy, regardless of prices – often investing near the top of the run-up.

The trade worked for a while. PBW soared roughly 200% in 2020. But then the fund peaked in February 2021. And it has crashed more than 50% since. Take a look...

This crash doesn't mean the megatrend is over. It doesn't mean clean energy is dead.

It just shows that no megatrend, no matter how big, can help your investment survive euphoria. If you buy when everyone else is excited, it's a recipe for losing money.

These stocks will turn around eventually. The megatrend that's driving them is still intact. But you want to wait for sentiment to cool off, and for the trend to reverse, before you consider buying.

Most important, you want to avoid euphoric markets as an investor. They might seem like a sure thing... But they're a recipe for big losses.

Good investing,

Chris Igou

Further Reading

When investors all start believing the same thing, betting against the crowd is the right move. That's exactly what we're seeing in one asset today. And history tells us we could see 20%-plus upside as a result... Read more here.

"Buying when shares are still falling is a dangerous game to play," Chris writes. Right now, investors are piling into a market that's in a major downturn. But with the trend against it, it's a sector you want to avoid for now... Get the full story here: Sentiment Is Dangerously High in One Falling Market.

Market Notes
'SELLING THE BASICS' IS A WINNING STRATEGY FOR THIS BEVERAGE GIANT

Today, we’re looking at a company that sells your favorite drinks…

Regular readers know that companies that sell everyday products make for great investments. Selling consumables that folks always need – like cleaning products and bread – is a great way to bring in returning customers. And that means these stocks can rack up steady gains. Take today’s company, for example…

Keurig Dr Pepper (KDP) is a leading beverage company in North America. It has more than 125 brands… including popular names like Canada Dry (soda), Snapple (tea and juice), and Peet’s Coffee. This wide range of hot and cold beverages encourages customers to come back for more… no matter what’s going on in the economy. And in its most recent quarter, Keurig Dr Pepper reported net sales of $3.2 billion, up 7.6% year over year.

As you can see, KDP shares have been rising steadily. They’re up 35% over the past two years and just hit an all-time high. As long as folks keep stocking up on their favorite drinks, this trend should continue…