Skip to main content
money management

Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto. He also hosts a weekly conference call called Monday Morning Jump Start, which is about strategies for financial advisors. Advisors can see it GlobeAdvisor.com. He can be reached at richards@getkeepclients.com

'Predictions are very hard - especially about the future."

This phrase, variously attributed to physicist Niels Bohr, author Mark Twain and baseball raconteur Yogi Berra, captures how hard it is to accurately forecast markets.

Flying in the face of the cloudy crystal ball we all contend with are "thematic" investors, managers who try to identify the big picture investment themes that will drive the economy.

To understand the challenges of the thematic approach, it's useful to look back at what's happened in the U.S. over the past fifty years.

The 1960s was the era of now forgotten conglomerates like ITT and LTV. It also saw the dominance of the "nifty fifty," as investors flocked to 50 large companies such as General Electric, Walt Disney and American Express. These were seen as one-decision stocks that you bought and held forever.

The 1970s saw generally lacklustre stock market performance and was dominated by the first dramatic spike in energy prices. If you saw that coming, you could position yourself for strong returns despite mediocre markets.

The 1980s was the first decade in which mergers and financial engineering played a significant role, with access to debt via junk bonds directly leading to the rise of swashbuckling corporate raiders seeking to unleash value in moribund companies. This trend was immortalized in Tom Wolfe's novel The Bonfire of the Vanities and the real-life Barbarians at the Gates , by Bryan Burrough and John Helyar, based on the leveraged buyout of tobacco giant Philip Morris by Kravis Kohlberg and Roberts.

It was also the decade in which Japan's economic success story rose to prominence and in which personal computers arrived on the scene. If you forecast those trends, you had the opportunity to do exceedingly well.

The 1990s saw the rise of category-killer retailers such as Wal-Mart and Costco and the decline of retail icons like Sears Roebuck and J.C. Penny. This period saw the dramatic rise of global financial markets and hedge funds and, of course, the acceleration of the information technology, telecom and Internet revolution. Anticipating these trends would have led to superior investment returns.

Finally, the first decade of the new century has been characterized by the remarkable rise of China and India, driving commodity prices to unprecedented levels. It featured the dramatic growth of globalization and a global real estate bubble, from whose collapse we are still recovering.

Fuelled by unparalleled processing power that allowed a huge jump in the complexity of financial dealings, this decade was also marked by the stratospheric rise in profitability at global investment banks, attracting the best and brightest from around the world. It also encouraged a level of risk-taking beyond the comprehension of both regulators and bank CEOs.

Again, if you had been among the ranks of those who saw this coming, you could have done very well indeed.

Looking back, there are two conclusions.

First is the lack of consistency from decade to decade.

And second is the incredible difficulty of anticipating most of these themes beforehand. In the words of Danish philosopher Soren Kierkegaard: "Life can only be understood backwards, unfortunately it must be lived forward."

The outlook going forward Today, there's lots of debate about the dominant investment themes that will mark the next decade.

The one on which there is virtually universal agreement is the shift to clean energy.

Other themes that you hear include the profound implications of the continuing rise of the middle class in emerging markets, the dramatic impact of an aging population in Western countries, the successful commercialization of the Internet and the need to build new infrastructure in developing countries and replace existing infrastructure in developed ones.

Finally, there continues to be speculation about the extent to which we'll have to worry about inflation stemming from the rise in government spending to stimulate the economy and the massive spike in debt around the world.

The challenge when using a thematic approach to investing is separating short-term fads from longer-term trends - and maintaining perspective on valuations and knowing when to exit if a theme you got into early catches fire and gets pricey.

Ingredients for success To make money from a thematic approach, four things have to happen.

First, you have to pick the right themes.

Second, getting the industries right isn't enough, you have to pick the winning companies. Seeing the potential of personal computers in the early 1980s wouldn't have paid off if you'd bought then-market leaders Atari, Commodore and Wang.

Third, you have to be able to pick up stocks at attractive valuations. Even if you'd identified tech winners like Amazon, Cisco and Intel, had you loaded up late in the cycle in 1999 and early 2000, you still got your head handed to you.

Finally, you need to have absolute conviction on your view of the future. Without that conviction, you are unlikely to stick to your guns when your picks hit inevitable rough patches.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
AXP-N
American Express Company
-0.03%227.69
DIS-N
Walt Disney Company
+1.14%122.36
GE-N
General Electric Company
-2.55%175.53
INTC-Q
Intel Corp
+0.91%44.17
WMT-N
Walmart Inc
-0.91%60.17

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe