REUTERS/Brendan McDermid
- UBS says there are five common mistakes that thematic investors need to avoid for their strategies to work.
- Laura Kane, the firm’s head of Americas thematic research, offers advice mostly centered around the patience investors should exhibit when deciding when to buy or sell.
- She also lays out how investors can avoid each of the five pitfalls she outlines.
Investing based on themes requires patience and confidence, according to one of UBS’s top researchers. But actually abiding by those principles is easier said than done.
Laura Kane — the head of Americas thematic research for the firm’s chief investment office — recognizes this, and has compiled a list of five common mistakes made by thematic investors of all types. She also lays out how investors can avoid each pitfall.
1) Chasing fads
Kane says it’s vital to understand the difference between a long-term trend that’s going to endure, and a fad that attracts tremendous hype and then fades almost as fast. Bitcoin, she says, is a fad. Meanwhile, changes in global demographics are an important trend in her view.
Kane writes that as the global population is growing rapidly and concentrating in cities, while the populations in developed countries are aging. Those have major investing consequences.
"We will see the need for healthcare technologies to cope with an aging population, as well as demand for more energy-efficient infrastructure in growing emerging cities," she wrote.
How UBS says investors can avoid this pitfall:
Investors should focus on the three main "inescapable forces" that should transpire, regardless of the business cycle:
- Population growth — By 2050, the global population will have surged to 10 billion from 7.5 billion at present time.
- Aging — By 2030, individuals older than 60 will outnumber those 25 or younger in developed countries.
- Urbanization — By 2050, UBS expects that 68% of the world’s population will live in cities.
2) Being too early
Everyone wants to be the first to identify a trend or a great trade, but there is often no advantage in being the first company to disrupt an industry. That means that, as an investor, you may not want to bet on a company that is shaking up a field because it might ultimately be beaten out by later competitors.
After all, Amazon wasn’t the first online bookseller, and if you’d invested in MySpace and passed on Facebook, you’ve probably been dealing with some regrets. Kane says that should be on investors’ minds as they consider investing in ride-hailing companies ahead of the expected IPOs of Uber and Lyft in the next few months.
"The shape of the ride-hailing industry is still being defined, as many variables continue to evolve," she wrote. "Until we get greater clarity on regulatory, liability, and even tax consequences, it will be difficult to choose winners in this space."
How UBS says investors can avoid this pitfall:
UBS says traders should let the dust settle in fledgling industries before making any specific decisions.
3) Making just one bet
An investor might be overwhelmingly confident about or interested in one single theme, but Kane says they shouldn’t put all their eggs in one basket because that’s likely to lead to volatility. If a trader insists upon a single theme, Kane recommends they be careful with the rest of their your portfolio to make sure its risks and rewards are well-balanced.
How UBS says investors can avoid this pitfall:
UBS says traders should diversify holdings so as not to get caught with outsized exposure to a failing idea.
4) Not looking under the hood
Thematic investors sometimes buy into any company that fits into their favored idea. But Kane says they need to look carefully at every company — especially if they’re new.
"A company could be exposed to an attractive theme, but that does not automatically mean it is a good investment," she writes.
In addition, Kane advises investors to look hard at issues like corporate governance and culture as well as financial measurements.
How UBS says investors can avoid this pitfall:
UBS said traders should do exhaustive homework on new entrants to industries and themes they’re pursuing.
5) Selling too soon
Kane writes that investors often sell too quickly because they’re afraid of future pain. But that haste can cause them to miss out on eventual gains that might dwarf their present losses.
"The temptation is high to walk away from long-term ideas that temporarily underperform," she says. "We advise against trying to jump in and out of long-term thematic investments."
Kane adds that over the last six decades, a buy-and-hold strategy for the S&P 500 has worked much better than trying to time market highs and lows. That’s illustrated by the chart below.
Jeremy Grantham, the widely respected investor who successfully predicted the last two financial bubbles, has made a similar point: In a market bubble, getting out of too soon can be just as bad as getting out too late.
How UBS says investors can avoid this pitfall:
UBS says traders shouldn’t abandon a long-term theme because of modest setbacks. It could hurt them just as much to get out too early than wait too long to exit.
UBS
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Source: Business Insider – mjay@businessinsider.com (Marley Jay)