Pick Out Persistent Themes
Updated: May 17, 2022
To invoke US conglomerate Berkshire Hathaway’s vice chairman Charlie Munger: if investing is not thematic, what the hell is it? Here is my simple investment ‘theme’: own things that go up; and do not own things that go down.
"Some of these trends will persist, others will not"
That is frivolous I know, but there is an important point here. The funds industry has coined the term ‘thematic investing’ for a reason. For me, thematic investing is about identifying long-term trends, then thinking about who the beneficiaries will be. This approach makes sense because it is actually easier to predict things over the long term than over the short term. To wit, I cannot say with confidence what the weather will be like a month from now, but I am almost certain it will be much hotter in 2100.
Predictability is all about pattern. Look at an entire photograph and the subject matter, the ‘pattern’, will be evident. On a small scale, however, you will only see ‘noise’.
Whether you are a professional or an amateur investor, there are a few ways to identify future long-term trends that are likely to persist. One is to look at which companies, sectors or countries have performed consistently well over the last couple of decades.
Those that spring to mind are internet-oriented companies such as Amazon; consumer technology companies such as Apple; the biotechnology sector; and emerging markets such as India.
There are long-term trends behind each of these. Amazon’s success reflects the trend towards online shopping, driven both by convenience and cost. Apple has been about miniaturisation, supported by competition beating design. The stellar performance in general of the biotech sector has been driven by a few long-term trends, whether ageing populations, increasing understanding of the DNA code and, as we are now all too aware, temperatures the rising risk posed by viruses. As for India, it is one of a handful of emerging markets that have benefited from globalisation, key competitive advantages such as a low-cost, well educated work force and, perhaps most importantly, an established shareholder oriented culture.
Some of these trends will persist, others will not. Globalisation is under threat, as countries, for whatever reason, appear less interested in international cooperation. On the other hand, populations will continue to age, driven by falling birth rates, technological advance will continue to drive miniaturisation, and there are still plenty of ways in which shopping can be made even easier.
Another approach is to think about the world’s big problems. Sadly, there are many, whether destruction of biodiversity and related collapse of ecosystems, rising global temperatures and resulting economic, political and social instability, increasing inequality and its impact on poor countries, poisoning of the biosphere through pollution, rising risk of pandemics as we encroach on the natural world where previously ring-fenced viruses tend to reside, cybercrime, chronic tax evasion and avoidance, rising populism and the prospect of a new cold war era. Encouragingly, however, there are many people around the world dedicated to finding solutions to these problems, so it is not all doom and gloom.
A third approach is to seek out futurologists whose business it is to think about long-term trends, particularly those that have not even got started yet.
The second step in the process, namely determining who the beneficiaries of trends will be, is just as important. The trend towards decriminalisation of marijuana has gone hand in hand with its increasing use as a medicine. However, competition has meant that investment in marijuana companies, whether upstream or downstream, has been an unprofitable exercise.
Ultimately, the most important aspect of thematic investing does not relate to the themes themselves but to mindset. The cost of positioning your portfolio in particular companies, sectors, and countries that will ride long term trends is that from time-to-time your portfolio will underperform markets in general, perhaps significantly; the reality is that nothing ever goes in a straight line.
Think of these periods as affirmations that you are doing the right thing, rather than as reasons to panic and abandon what is an eminently sensible approach.
Published in What Investment
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.