top of page

Running Behind Themes

I just came across this very interesting thread on Twitter; would highly recommend every to read it slowly & thoroughly-


The core aspect that the writer is trying to highlight is the pitfall of focusing & concentrating too much on the current theme in the market and positioning your portfolio to benefit from the same; which he terms as a narrow portfolio.


I think anyone who has been in the markets long enough can resonate with his thoughts given that there have been so many instances in the past wherein certain investors or fund managers have achieved hero status during a certain time period only to be termed as zeros in the subsequent time period.


And the reason has always been that the only reason they ended up becoming hero & doing so well during a certain period was because their portfolio was positioned & concentrated on a single underlying theme that was playing out in the market and as soon as that theme faded it worked against them.


So, though their performance would be extremely strong during a certain period, the long term performance is not great given that the subsequent downcycle is equally strong.

 

In past few years, PSU, Defence & Railways have clearly been the strongest underlying theme. But I can say with a lot of confidence that the only people who have been able to participate big time in these themes are;


  1. those whose portfolio have always been positioned in favor of such names ie. they have been bullish on these themes for many years and after a period of poor performance they are now benefiting from the upcycle.

  2. New investors who have entered the market over last few years.


The reason why new investors have been able to participate in these themes is because they do not have past experiences with such themes ie. no battle scars.


This theme of PSU, Defence & Railways was touted back in 2017-2018 cycle as well. If anyone goes back and reads the concall of defence & railway companies in 2016-2017, they will see that, during that time as well these companies were talking about getting large orders, but nothing happened and anyone who invested in these names had lost big time.


Which is why this time when that same narrative built up, most investors did not pay any heed to it. But this time orders did come and thus these stocks have done extremely well.

 

In their latest letter, 2Point2Capital shares one of their experiences which is on similar lines;


Some might think that they can switch between themes at the right time, but ask anyone it does not work. Even the investors who are fully invested in a particular theme are not able to exit well despite the fact that they being invested in that theme would ideally mean that they would be tracking & understanding that theme much better than most. But still, they are not able to do so.


And if anyone looks at the past, such thematic moves tops out much before the numbers deteriorates and even before the qualitative aspects turns negative. Look at the 2015 pharma top or 2017 NBFC top.


The same plays out during an upcycle as well wherein the stock prices starts moving up much before the numbers or the qualitative aspects turns positive.


And thus, timing becomes a key factor both on the buying & selling to actually pocket the strong returns that the theme would deliver. Any delay on either side would mean materially lower realized returns.

 

This ability of the market to preempt much in advance is something that has always fascinated me big time. Not sure how & why it happens, but it just does.


The only rational that I have been able to come across is that, everytime when there is some early buzz around a theme, the stocks start moving higher and then if things do start building up in terms of qualitative developments then the trend sustains & then grows with actual numbers. However, since we as investors mostly work with hindsight, we only look at successful trends and therein it seems like market was so early in figuring out upcoming positive developments whereas we are not looking at many such failed moves wherein the stock prices would have moved higher in anticipation but since the positive developments did not happen, the trend was not created and these kind of smaller moves are lost in price charts as normal market moves.


Same plays out on the downside as well, wherein every downturn starts with a correction, but which correction ends up being just a pull back or the eventual start of downcycle is only known in hindsight.

 

So, what is the right approach? The writer in the above thread provides a good insight. He says build a core portfolio that is not optimized for a certain theme i.e a broader portfolio. And some portion of your portfolio is where you can try to optimize for a particular theme.


Another thought that I want to share here is that there would be times when some of the stocks in your broad portfolio will end up becoming part of a theme and thus you get a certain short-term boost in your broad portfolio as well.


This happened to me in 2020 when before covid I was bullish on CDMO as a theme and owned multiple stocks- Suven, Syngene and PI Industries, purely as an outcome of a bottom’s up research. However, with Covid, whole Pharma & CDMO as a theme became hot and the valuations got re-rated big time.


So, a broader portfolio always opens you up to such instances.

 

Another important thought that I want to share is that it is not necessary to participate in a particular theme to do well. Even in the 2003-2008 cycle, though Real Estate and commodities was the primary & the most dominant theme, what is also true is that some of the other businesses like Telecom also did extremely well. Because eventually market is chasing growth and it is not that only 1-2 themes will have all the growth, there will always be other pockets of growth that will do equally well as the frontline theme. And thus, one does not have to have FOMO for a particular theme.


One can do really well over the long run, if you build a broad portfolio that captures growth across multiple themes and businesses. Focusing too much on a particular theme looks great in the short run, but the long term in any theme is full of upcycles & downcycles.

 

A closing though that I would like to share is that like how even though trading is more lucrative than investing, but it is also an equally hard and lower probabilistic way to do well in the markets in the long run vs investing; similarly, an investing approach focused on narrow portfolios is also an equally hard and lower probabilistic way to do well in the markets in the long run vs an approach focused on broad portfolios.



 

Disclosure:

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

0 comments

Recent Posts

See All

Comentarios


bottom of page