[parenthesis]

A problem with (2) is what if all the companies in your industry are rubbish investments relative to the index. You may be able to identity the best business in your sector, but it may still be a worse investment than the worst company in a different sector.

A second problem with (2) is that working in a particular industry makes you already massively `overweight' that sector. If something goes wrong with that industry, you could be out of a job. The last thing you need is for your investments to go wrong at the same time.

[wegs2]

(1) In an efficient market, all the companies are one segment are no more and no less likely to be either rubbish or overvalued than any other segment. The risk is random.

(2) You manage that with diversification. I'd never allocate more than 25% of my portfolio to my own active management. My expected returns are slightly higher than index.

(2a) Buying stocks for my employer or their competitors would be difficult for insider trading. I'm much more likely to buy adjacent segments: suppliers, customers, etc. If I'm picking a supplier, I'm uniquely qualified to have alpha on their stock. On the other hand, my own job isn't very exposed to market changes in those segments.

[CameronNemo]

If you are willing to trade options, you can buy puts for shaky firms in your sector. Whole sector goes down, you lose your job but win big on the options.