I’ve always believed that change is the only constant in life, and this belief grew even stronger after a recent meeting. As a part of my routine, I regularly meet with some investment experts like analysts, fund managers and strategists. While such engagements do help me learn and grow, at times they also bring along some surprises and an obvious shift in perspectives over time.
During one of these meeting, a friend of mine made a statement “buy and hold style of investing is dead”. I was shocked to hear this but was confident that the other expert in the meeting would disagree instantly. To my surprise, even he agreed! Of course, this sparked a lengthy debate, leading me to eventually acknowledge their point of view.
I realised that in today's rapidly evolving world, various factors like technology advancements, regulatory shifts, and policy changes are continuously impacting businesses. The traditional "buy and hold" approach has transformed into a more vigilant "buy and watch" strategy, highlighting the need to stay attentive to changing trends while maintaining a long-term perspective. And this prompted me to started exploring the concept of Megatrends Investing - A term initially coined by John Naisbitt in the 1980s to describe long-term transformative changes that impact businesses. By the early 2000s, many investment firms had adopted this approach to forecast the future of their investments, and its adoption has accelerated in recent years.
Introduction to megatrends investing
Change is constant. Sometimes changes often repeat in a cycle. And sometimes, changes are transformative forces that shape our businesses and societies. These long-term changes that have a significant impact on our future are megatrends. They create many trends within them as they impact different sectors and industries. By understanding these megatrends, investors can position themselves to benefit from the future opportunities they present.
Megatrends investing is about uncovering, identifying, and understanding forces that can change the way businesses and consumers operate. And discovering the investment opportunities they create. An investor with a long-term investment horizon is taking a calculated risk on an unknown future for reaching his/her financial goal. Using megatrends investing, this long-term future becomes discernible to some extent.
Short-term investors tend to be opportunistic and focus on the direction of the next tick. However, long-term investors are more strategic, looking for the direction of growth and endeavouring to identify where the growth of a company/companies is underappreciated. Typically, people tend to underestimate long term non-linear growth prospects. Megatrends investing helps cut through short-term noise and focus on long term growth opportunities.
Many businesses also use megatrends to forecast future profit pools and drive innovation within their organizations. Adopting a business-like mindset when investing can allow investors to integrate foreseeable trends into their investment portfolio.
Imagine investing in a stock for the long term, say, 5-10 years. The chosen company is expected to have a promising future, and while you may not know precise valuations or ratios like profit margins or return on capital, you are confident in its growth potential. Studying megatrends increases the predictability of forecasted growth and can serve as the foundation of your investment portfolio.
What are some of the other benefits of the megatrends investing approach?
Future aligned portfolio: Evaluating the potential of individual trends and diversifying positions across those with the highest potential ensures the portfolio remains aligned with future developments.
Tracking profit movements: Studies have shown that equity returns are closely tied to long-term trends. By adopting a megatrends approach, investors can track profit movements and capitalize on them effectively.
Mitigating behavioural biases: Megatrends investing helps counteract biases, such as recency bias, by understanding and capitalizing on non-linear changes.
Risk mitigation: Megatrend investing provides investors with the opportunity to look beyond traditional sectoral or market cap classifications. Instead, it evaluates the relative potential of individual trends and diversifies positions across those with the highest potential. This approach also enhances risk mitigation through diversification.
By identifying and capitalizing on the transformative forces that shape our society and economy, investors can potentially achieve sustainable growth and enhance their long-term investment returns. Incorporating megatrends investing in one's portfolio results in a structure positioned towards high-growth compounders that create significant economic value for shareholders. It is an approach that enables investing today while anticipating the changes that tomorrow will bring.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital.
The writer is CIO, Bajaj Finserv Asset Management Limited. He is an investment professional with 22 years of experience in investing in the Indian capital markets. He has been part of the mutual fund industry for 17 years, where he has managed products across market capitalisation and themes, and developed models on Sustainable Investing, Quant Investing and Asset Allocation.