Thematic Investing

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JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Thematic Investing

Thematic Investing

Disclaimer: I am not an economist, financial advisor, or in any way an authority on the following subject matter. This post is for information and discussion purposes only.

Earlier this week I was privy to an upcoming Two Bears With Steve podcast episode on investing. One of the topics discussed is investment themes and this got me thinking that a thread on this subject might be beneficial for all of us here.

 

What is Thematic Investing?

From the article Thematic Strategies: An Alternative Approach to Global Investing I extracted the following definition:

Thematic investing involves identifying certain social, economic, industrial, and demographic trends, or “themes,” that may ultimately drive the positive performance of a portfolio of securities benefiting from these trends.

Basically, as a thematic investor, you identify unfolding trends and potentialities, and invest your capital accordingly. I believe as students of Dr. Martenson's work, and due to the diversity of thought in our community, we have an unique advantage in identifying and capitalizing on many potential opportunities. 

 

But before begin the discussion on potential themes and how to invest accordingly for each, I think it might be prudent to take a closer look at the process of investing.

 

What Is The Purpose of Investing?

 

While the answer to this question may seem obvious, it might be productive to dig a little deeper than the obvious. In my opinion, the purpose of investing is to maintain and grow one's purchasing power over time. The distinction here being the focus on purchasing power instead of money. As we are all to aware of, money is typically not the best retainer of purchasing power. In fact, it is because of this, that the need to invest capital exists.

 

Timing Is Everything.

 

I think the last decade proved quite effectively that traditional buy-and-hold investing is no longer a viable technique to maintaining purchasing power. The glaring exception to the rule to this observation would be the performance of the gold market over the last decade. Yet, market history would suggest that all asset classes move in and out of favor over time, and a buy-and-hold strategy simply doesn't utilize this market dynamic properly.

 

To maintain and grow your purchasing power, you must time your investments in relationship to the capital flows in the markets.

 

 

Is Market Timing Impossible?

 

Timing the markets precisely is very improbable, but market timing doesn't have to be precise to be effective. An investor can easily use market sentiment indicators to mitigate much of the risk in any particular market. As markets are a virtual gathering of people, the herd mentality becomes a real factor at times. To utilize this herd mentality for your own gain only requires some easy to get information.

 

Conclusions.

 

  • Our goal in investing is to maintain and grow the purchasing power that we have earned in our lifetime of work.
  • Timing the movement of our capital in relationship to the market is critical to maintaining and growing purchasing power.
  • Where (or how) we invest our capital is best determined by analyzing unfolding trends in the economy, the markets, and our daily life.

So now I would like to ask any one who is interested in discussing potential investment themes to please do so. I'm sure many themes might be obvious, but I'm hoping in the discussion that follows we might uncover some not so obvious themes to the benefit of all.

Jeff

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Hedging the Cost of Living

One particularly ubiquitous anxiety in the financial blogosphere is the fear of Fed-induced inflation and how that might impact a person's cost of living. While personally  I don't feel that we will be seeing any net monetary inflation for some time, the fact that this fear is so widely held makes it a significant market factor in my opinion. Because of this, I might be inclined to invest some capital as a hedge against a rising cost of living. This how I would implement this strategy:

  • Estimate your current cost of living over a given period, lets say a year. In this calculation you would include things like food, gasoline, electricity, water, and anything else that you pay for to live your daily life.
  • Once you have estimated what these daily purchases would cost you for a year, you invest a portion of your capital equal to that yearly total in the commodities and businesses that provide these daily necessities to you.
  • This is in effect a market neutral approach. For example, if the price of food rises in your daily life, then your investment in the food commodities and businesses would rise to help neutralize the additional cost of food in your daily life. But if the cost of food decreases, then your savings in daily life would neutralize the loss in your food related investments. The net effect is to maintain your purchasing power at its current level.

With the many ETF options available today, its not difficult to find the appropriate cost of living hedge investment.

For a more detailed example, see my post Simple Strategy to Hedge Against Rising Gasoline Prices.

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