As you browse through the sites of top investors (or even prospectus of top mutual funds), first thing you notice called ‘Investment theme/objectives’. It is what drives investment decisions.
It answers two critical questions related to investments.
- What type of companies do you invest in ?
- What sectors do you find interesting ?
First question considers horizontal view of the market, second question gives a vertical view about sector allocations, often influenced by macro-level trends. Especially, for technology companies, it is possible to have applications across multiple sectors, thus horizontal view becomes much more important than vertical one.
Investment themes act as guiding light for investment decisions.
For retail investors, it is important to define your investment theme/objectives upfront (can be simple 10-point criteria to begin with, as in example below) . It allows you to filter the noise and focus on specific companies.
Investment Themes continue to evolve over time and often requires understanding on macro-level trends affecting business. For example, ongoing digitalization of legacy businesses and increased role of technology in day-to-day lives of consumers can be one of upsetting trend for many businesses.
Would be prudent to define your ‘investment theme’ which suits your style of investing/values, before starting in the market and keep on refining as you become wiser.
Here are examples on how investment themes will drive investing decisions.
From leading VC in technology space (Foundry Group)
We are currently investing in the following themes:
– Distribution: Giant existing online markets can be completely disrupted by new distribution methods like Facebook, Twitter, Mobile, and User-Generated Content. Sample companies include Betabrand, Cheezburger, Mocavo, StockTwits, Sympoz, and Zynga.
– Glue: Computers love to talk to one another. The amount of “computer to computer interaction” is increasing at a dramatic rate. There’s a software layer that “glues” this together. Sample companies including AppDirect, Chute, Cloudability, DataHero, Gnip, MapBox, MongoLab, Next Big Sound, Pantheon, and VictorOps.
– Human Computer Interaction: The way humans interact with computers 20 years from now will make the way we interact with them today look silly. Sample companies include 3D Robotics, Fitbit, Harmonix, littleBits, Makerbot, Modular Robotics, Oblong, Occipital, and Orbotix.
– Marketplace: There are huge pools of remnant resources and new marketplaces are bringing those resources to the surface. Sample companies include Dragon Innovation, Modria, PivotDesk, Rover.com, and TeamSnap.
– Protocol: Many protocols – both formal and informal ones – support extensive software ecosystems. We’ve been investing in protocols like SMTP, RSS, XML, and SMS for years and expect to continue doing this. Sample companies include Authentic8, FullContact, JumpCloud, Moz,Return Path, SendGrid, Spanning, Urban Airship, and Yesware.
Value Investing firm (Value Quest Capital)
- Our exclusive focus on moats implies a very high rejection rate — industries and companies we would reject for even defining our “opportunity landscape” either because those businesses:
- Do not possess an enduring moat;
- Are not scalable; or
- Are run by managers having a poor track record in capital allocation or corporate governance.
- No index tracking: We do not mimic any index. We believe that in order to do better than the market, we have to do things differently.
- Our very long term investment horizon and extremely low portfolio turnover differentiates us from the typical institutional investor.
Here’s the sort of business we are looking for:
- Enterprise value in the region of Rs.100 crores (Rs.1 billion),
2. Demonstrated consistent earning power (future projections are of little interest to us, nor are “turnaround” situations),
3. Businesses earning good returns on equity while employing little or no debt,
4. Management in place (we can’t supply it),
5. Simple businesses (if there’s lots of technology, we won’t understand it),
6. An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).