Thematic investing is a function of conviction and belief. Conviction grows when you believe in the right space for the right reasons. Merely believing in something and expecting your beliefs to play out in the market does not guarantee success. One should be diligent in building conviction in the right theme. This means that we should believe in something only when we have satisfied ourselves that there are very strong fundamental reasons. Thoughts can always be scattered and random. It is important to ensure that we don’t take such scattered and random thoughts for beliefs and mistakenly build conviction.
Themes are an effective way to channel our thoughts to identify areas in the market which can deliver performance. A theme helps us build a hypothesis, validate it effectively, and then decide the best way to participate in it. Thematic investing has been enormously successful in the last decade. Yet, the markets have not seen merit adequately. Going forward thematic investing will deliver outlier returns.
Identifying themes involves a lot of foresight, anticipation, and ideation. Investors must realise that thematic investing is not about participating in one theme but in multiple themes. A portfolio investing in multiplying themes offers superior return potential. Investors must build portfolios that provide ample scope for the representation of such winning themes. That can happen only by investing when themes are out of favour. Investors must be willing to bet on them when no one wants to. Waiting is also an integral part of thematic investing. Investors must be willing to be patient when going against the tide. Eventually, the market sees merit in your conviction and rewards you handsomely.
The experience of investors in value-oriented themes like PSU, commodities and banking clearly proves that thematic investing requires preparation, a course of action and most importantly staying put. Investors representing such discipline will always be on the winning side.
