In the last article, we covered the strategy to ‘Pace our Investments & Build a Mature Angel Investment Portfolio’ which is crucial to understand to enhance the portfolio returns.

In this article, we’ll discuss a question that bothers many accredited investors. The question is ‘You are an industry expert? Should I invest most in that industry? Getting an answer to this question is very crucial. Being an industry expert can provide valuable insights, but investing solely in that industry may not be prudent. While expertise offers an advantage, it's crucial to consider broader market trends and opportunities. Investing across industries can hedge against sector-specific downturns and capitalize on emerging sectors. This is exactly what we will delve into in this article.

As usual, we’ll try to explain this concept using a story. Let’s begin!

In the bustling city of Kolkata, there was an industry expert named Radhika. Known for her deep knowledge of the chemical industry, Radhika had spent years working her way up from a chemical engineer to a senior executive at a leading chemical company. Her expertise was widely recognized, and she often spoke at conferences and wrote articles on the latest tech trends.

One day, Radhika decided to venture into angel investing. She attended an Angel Investing Masterclass to learn more about diversifying her portfolio and maximizing her returns. During one of the sessions, a question was posed that resonated deeply with her: “You are an industry expert. Should you invest most in that industry?”

Radhika’s initial thought was, “Of course! I know chemical engineering inside out, so I should put most of my money where my knowledge is. I know the technicalities and I have an established network of professionals that helps me stay up to date with the latest trends in the sector.”

As the masterclass progressed, she began to see the bigger picture.

Her instructor, a seasoned investor named Shaurya, shared a story of his own. He too had started investing primarily in the industry he knew best – Hospitality. At first, his deep understanding of the field gave him an edge, and he made several successful investments. However, over time, the market dynamics shifted, COVID struck, many restaurant & hotel businesses were forced to shut down and his heavily concentrated portfolio started to underperform. Shaurya had picked the best of Restaurant businesses across India & seemed to be sure of earning handsome returns but once COVID struck, and across the world businesses were forced to shut down.

Shaurya explained that while having expertise in an industry can be advantageous, it also comes with the risk of overexposure. The economy can be volatile, and even the most expert investors can't predict every twist and turn. After all no one could have predicted a Once-in-a-Century pandemic. Diversification, he emphasized, is key to mitigating risk.

She decided to contact her old friend cum mentor Rajesh who was an experienced investor himself. Rajesh was holding the position of an Independent Director in a Solar Photovoltaic Cell Manufacturing firm. In other words, his company was involved in Solar panel manufacturing. It is safe to say that he possessed a good knowledge of the Solar industry.

Rajesh had invested in a few Solar industry-based startups that he saw had huge potential going forward. The only concern he faced was that these firms were importing Solar modules from China. It was all going very well till 2020 but once Covid struck, the government came up with the Aatmanirbhar Bharat initiative under which they planned to incentivize local manufacturing & remove over-dependence on any third country. As a result, the government increased the customs duty on Solar modules imported from China making it increasingly difficult & expensive for both the startups to import products from China on which they were heavily reliant. The increased costs directly impacted their margins which started falling and as a result, many investors exited.

Rajesh while giving a lesson shared the Canslim Theory which states that when an individual decides to invest in a business, out of 100% investable amount 30% depends upon the business, 30% depends on the sector & 40% depends on the market.

Let’s understand this with the help of an example. In the decade of 1990s, India’s domestic Steel Industry was underperforming as in the foreign marketplace, foreign steel manufacturers, primarily from China were preferred as they were providing steel to Global giants at cheaper prices compared to Indian steel companies. So even though the steel market was overall booming with increased demand & management of JSW, Tata Steel was highly experienced & capable, since the sector was underperforming, many investors were wary of investing in these global giants. It was only after 2014 that the Indian government decided to provide incentives to steel manufacturing units to set up their plants and further ramp up their capacity which resulted in an increase in revenues and profits for the steel manufacturing companies. Post that many investors started finding this sector increasingly lucrative.

Inspired by Shaurya & Rajesh’s experience, Radhika decided to re-evaluate her strategy. She recognized that while her chemical engineering expertise gave her an edge in evaluating chemical startups, relying too heavily on one sector could jeopardize her overall investment portfolio. She started to diversify, investing in a mix of industries including healthcare, consumer goods, and renewable energy.

Over the next few years, Radhika built a well-rounded portfolio. Her investments in different sectors not only spread her risk but also provided her with insights into various industries, making her a more versatile and informed investor. She continued to leverage her tech expertise but always kept in mind the importance of balance.

At subsequent Planify Angel Investing Masterclasses, Radhika shared her journey. She encouraged new investors to leverage their industry knowledge but to always remember the importance of diversification. “Being an expert in your field is a strength,” she said, “but investing wisely means looking beyond what you know and embracing a broader perspective.”

A question that was widely asked to her during her interaction with budding investors was ‘How would an investor identify which company to invest in?’

To this question, Radhika stated that the Principle of Finance would hold. In any business across any sector, if an investor would like to invest, they need to prepare a Scorecard that will assist investors in identifying key parameters related to that sector based on which they can make their decision to invest or not. She further promised to explain the Scorecard Methodology in a future session on the Planify Angel Investing Masterclass.

Radhika’s story became a cornerstone lesson at the masterclass, demonstrating that while expertise in a specific industry can provide a competitive edge, true investment wisdom lies in building a diversified portfolio. This approach not only mitigates risk but also opens up opportunities for growth across different sectors, ensuring a more resilient and successful investment journey.