Why you should invest in long-term themes

January 20 2017
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While there are some very successful global investors who class themselves as contrarian, unless you can devote all your working hours to it, a safer bet is long-term thematic investing.

The beauty of the markets is there are many ways to make a profit. While there are some very successful global investors who class themselves as contrarian, unless you can devote all your working hours to purely investing, we strongly believe investing in long-term themes can provide a more effective way to maximize returns. This is primarily due to the following four practical reasons:

1. Relatively easier to spot long term investment themes

Some of the best investment ideas come from the things you see or experience in everyday life. There are visible long-term themes that can impact the performance of certain investments, for example the fast growth in smartphones following the launch of the Apple iPhone in 2007 or the shift towards online shopping in Australia and around the world. Going through your daily life, you’ll no doubt see many more examples, which may provide the starting foundation for a strong investment theme for you.

Contrarian investing ideas are usually not quite as simple to find. Yes, you can simply say you disagree with the market but you should have good reason for doing so based on robust fundamentals. The classic example of buying shares in a company just because its price has gone down materially, for no other reason than thinking it must go back up, is not contrarian investing. That is just hoping for the best.

2. Emotional biases get in the way

When it comes to investing, half the battle (or more) is not letting your emotions cloud your decisions. The emotional draw of successful contrarian investing is very appealing. Most people derive some satisfaction from being right when the market gets it wrong. Let’s call it the ‘smartest person in the room’ feeling. Unfortunately, it also has a significant downside.

Betting against the market significantly amplifies emotional responses and unless you can truly separate your emotions from investing, it can lead to some very poor investing decisions. From experience, we have seen countless quasi-contrarian investors hold on to awful investments for far too long because they are waiting for the ego-boosting moment that their investment decision turns out to be right.

Investing in sustainable long-term themes might not give you the same ego boost when you get it right but it is also much less financially and emotionally risky.

3. Selling at a loss

Some contrarian investments may take many years before a successful investment outcome occurs. This makes sense given contrarians tend to invest in companies or industries out of favour with the share market because of poor performance. It may take the management of these companies some time to address performance issues or adapt to changing market or industry conditions. During this time, it is not unusual for the contrarian investor to lose money. Would you be willing to sell these investments and realise a loss before the contrarian investment proves to be correct if you needed cash?

Investing in long-term themes doesn’t guarantee a profit either. However, since long-term investment themes usually have some form of positive market momentum, the average time horizon for potential positive performance tends to be less compared to contrarian investing. Unless you are sure you won’t need access to the invested money at any time, contrarian investing may not be the most practical approach for you.

4. You are time poor

By definition, a contrarian investor has an opposing view to the general market. To be truly successful at contrarian investing requires extensive and continuing fundamental research to understand what the market on average is pricing in and why the market might be wrong. This takes time and ideally it should be a full-time job to find the smallest snippet of information which may support your contrarian investing views.

Time and dedication is also needed to identify long-term investment themes. However, once you’ve picked the right long-term theme, it shouldn’t be a continuing extensive time burden. There will be others invested in the same theme and usually ample information available for you to judge how the investment is progressing, the different types of companies that can provide exposure to the theme, and the overall growth drivers.

Unless you are willing to dedicate significant hours every week to contrarian investing, you are likely better off finding a long-term investment theme that makes sense to you and where there is consensus in the market that positive growth is more than likely.

Kent Kwan, co-founder, AtlasTrend

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