Thematic Investing
I mentioned in my previous article 6 ways to find a new case! thematic investing as one method to find cases. I look at themes when I am searching for cases because I see them as surfing a wave. As long as I am right about the theme, it is a high probability the revenue will be higher in the future.
When it comes to investing, the key is to look ahead and try to identify trends that will shape the future. These trends can be driven by demographic, technological, economic, or social changes. Investing in these trends, known as thematic investing, can be a great way to capitalize on long-term growth opportunities.
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Thematic investing is the process of investing in companies that are part of a larger trend or theme. This approach differs from traditional investing, which focuses on analyzing individual companies and their financial metrics. Thematic investing instead looks at the bigger picture and the underlying drivers of change that will create investment opportunities.
While thematic investing has several advantages, there are also some potential downsides to consider. Let´s jump into the pros and cons:
Pros of Thematic Investing:
Exposure to Growth Opportunities: Thematic investing allows investors to capitalize on long-term growth opportunities by investing in companies that are part of a larger trend or theme. For example, investing in companies involved in renewable energy allows investors to tap into the potential growth of the clean energy industry.
Diversification: Investing in a single company can be risky, as the success of that company is tied to its own specific circumstances. Thematic investing allows investors to diversify their portfolio across several companies that are part of a larger theme, reducing the risk associated with individual companies.
Emotional Appeal: Thematic investing can appeal to investors who are passionate about certain themes or causes. Investing in companies that align with their values can be personally fulfilling as well as financially rewarding.
Circle of competence: Investing in a theme can build up a certain competence quite quickly and, in doing so, get a greater understanding of several companies. It doesn’t take to a lot of time to become very knowledgeable about a specific subject.
Value-chain investing: When a theme is emerging and growing at an incredible rate and a lot of investors are looking at the theme, an investor who has done their research can benefit from the theme by investing in the value chain. As with computers, the main companies in the theme may not be the greatest winners in the end. When computers came and started the “computer age,” many computer companies had enormous growth. However, due to the competition and simplicity of a computer, the market is racing to the bottom on price, and the margins are slim. But companies that process data, such as Automatic Data Processing, had huge benefits due to computers and the price decrease. Increasing production and increased productivity became cheaper every year.
Cons of Thematic Investing:
Risk: Thematic investing can be riskier than traditional investing, as it relies on the success of a specific theme or trend. If that trend does not materialize or the companies within the theme do not perform as expected, investors may experience significant losses.
Limited Diversification: While thematic investing can provide diversification across several companies within a theme, it may not provide diversification across different sectors or industries. This can leave investors vulnerable to broader economic or market risks.
Limited Flexibility: Thematic investing requires a long-term perspective, as trends can take years or even decades to fully materialize. This can limit investors' flexibility in responding to changing market conditions or shifting economic environments.
High Valuation: When it is considered a theme, the rest of the world usually gets the memo about it being a lucrative theme. Growth investors include it in their funds, ETFs, and theme mutual funds is started. Capital is flooding in. But you can use this to your advantage because this I essentially what you are betting on. In the short term, it can be a problem with a high valuation. However, it should not be a problem in the long-term, as long as the theme has a longer run-way than a few years.
So, what are some of the trends that will shape the world in the coming years? Here are a few examples:
Clean Energy: As the world moves away from fossil fuels and towards renewable energy sources, companies that produce wind, solar, and hydroelectric power will be well-positioned for growth.
Artificial Intelligence: AI has the potential to revolutionize many industries, from healthcare to transportation. Companies specializing in AI technology or using it to improve their products and services could see significant gains in the coming years.
E-commerce: The shift towards online shopping has been accelerated by the COVID-19 pandemic. Companies that provide e-commerce services, such as online marketplaces and payment processors, will continue to benefit from this trend.
Genomics: Advances in genomics have the potential to transform healthcare by allowing for personalized treatments and targeted therapies. Companies that are involved in gene editing, genetic testing, and drug discovery could see significant growth in the coming years.
Cybersecurity: As more and more of our lives move online, the need for cybersecurity is greater than ever. Companies that provide cybersecurity services and technologies will be in high demand as cyber threats continue to evolve.
These are just a few examples of the many trends that will shape the world in the coming years. Thematic investing allows investors to capitalize on these trends by investing in companies that are well-positioned to benefit from them.
When investing in themes, it is important to do your research and choose companies that are leaders in their respective industries. Look for companies with strong fundamentals, a history of innovation, and a clear growth strategy.
Thematic investing can be a great way to diversify your portfolio and capture long-term growth opportunities. By investing in trends that will shape the world, you can be part of the change and potentially reap significant rewards in the years to come.
I myself particularly look at cybersecurity, fintech, gaming, gambling, digitalization, and medtech. Because I think they will have a stickiness in their business model after the initial growth of the themes.
Do you look at any themes? Let me know which ones and why!
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