Wednesday, August 23, 2006

Investing via themes ... or via financial statements

Over at Random Rogers, (Roger Nusbaum), a fellow blogger I read nearly every day, he's really big on investing in themes.

Given that Roger is a big proponent of ETF investing, that stands to reason. Roger's forte is obviously trying to enhance returns by not just investing in low-cost investment vehicles like ETFs, but then trying to sweeten those returns by looking at other big sweeping factors that'll influence values: investment themes.

I've learned a considerable amount from Roger and using his ideas to broaden my own thinking, portfolio holdings, and returns; in fact, my propensity to recommend emerging markets as a huge, long-term and reasonably-priced theme, owes much to Roger's thinking style.

Having said that, however, I also think that thematic investing requires a certain amount of patience and isn't necessarily suited to every investor. For instance, being right about the theme of commodities being underinvested in, in the late 1980s and early 1990s, would have been completely right, but far too early to make any money from it.

Sometimes, the theme is right, but the market is wrong: a situation of theoretical low risk, but also of low/no/negative returns. By the time the market realizes you were right - you could well have exited the theme: who's got the patience to wait ten years to be proven right?

For some investors with the appropriate skill set (an ability to read financial statements chief amongst them), an idea needing less patience is investing by value situations. What "value" means is finding the right combination of value and growth, at a favorable price. In fact, at a price that you think is completely unfair to the seller. Hence, you become a buyer.

When you can find appropriate situations like that, you don't have to wait around for the theme to unfold.

For instance, the legendary value investor Marty Whitman discusses in his book, The Aggressive Conservative Investor, investing in Japanese non-life insurance companies for years during the brutal Nikkei decline from 1997 to 2004 (a decline in the index that cut the index value in half). Yet, because of his ability to ferret out value, his Third Avenue fund was able to earn an annual 10% compound return on those Japanese assets over that period. No need for the "Japanese" theme to unfold. Instead, a hunt for value provided a decent return, without requiring the patience of Job.

At times, value investors are able to combine the idea of thematic investing with ordinary value investing to achieve extraordinary results.

So don't forget to check your own toolbox as an investor, and attempt to put more tools in there that you can use during your investing years. Thematic and value investing: a potent (but infrequent) combination.



JW

The Confused Capitalist

3 comments:

Roger Nusbaum said...

thanks for the kind word

moneyisgood said...

I think theme+value makes a lot of sense. Indeed, I'd say that it's wise to throw in a bit of "market-timing" too, in the following sense:
Rather than putting money on a theme and waiting patiently for it to unfold, one would usually do better by waiting patiently for signs that others have caught on to the theme.

Jay Walker said...

Hey Roger,

No problem, well deserved ...

JW