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Lovisa Alvin
Lovisa Alvin
Articles (43) 

How to Pick Stocks When the Market Is Erratic

Theme-based investment is a short-term strategy that you can use to limit risk factors

May 08, 2017

The stock market is often an erratic place and sometimes many investors may be challenged to determine just which trends will get them a profit at the end of the day. Betting on one particular theme might be the way to go. Even though it is a high-risk thing to do, the returns can also be very high. There are certain sectors that tend to be seasonal and cyclical. These sectors offer at least for a limited time an opportunity for investors to make great returns on high-risk bets.

Let’s explore an example from India just to be clear on what we are talking about here. India experienced consecutive droughts in 2014 and 2015 and because of that, it was widely assumed that 2016 would be a good year with enough rain. The anticipation was that rural consumption would shoot up after a period of decline in the drought years.

True to this assumption, the rural consumption theme in India was playing out perfectly until the government decided to demonetize high-value currency notes. This was a major blow to rural consumption and the entire rural economy in India. What does this tell you? Theme-based investment is a good strategy, but it can be constrained with time. If you are going to explore the strategy, you must get in and out fast before the theme is no longer a factor.

Here are some of the strategies you can use to pick stocks in theme-based investing:

Diversify

A theme-based portfolio needs to be diversified as a strategy in risk management. Even though at times there can be a limited scope of diversification, it’s always best to diversify stocks either geographically or in terms of sectors. For example, if you are doing a theme-based investment in the infrastructure sector, instead of just focusing on stocks in the construction space, you can diversify your portfolio by buying in real estate, infrastructure, real estate financing and capital goods.

Valuation

Valuation is a crucial element in theme-based investing. As an investor, you are looking for undervalued stocks. When you are putting your money on the stock market, there has to be enough upside for you to make a return. You only get that upside if you invest in undervalued stocks. Even though it’s often difficult to find significantly undervalued stocks with great future potential, it’s still a possibility you can explore.

Timing is everything

As we have clearly highlighted above, theme-based investing can be constrained a lot by time. You need to get in when stocks are low and get out when they have peaked. Although it sounds easier said than done, it is the only way of making a return. Theme-based investing can be very seasonal and the last thing you need is to hold on to stocks for far too long.

Theme-based investment is a high-risk investment strategy, but if it’s executed in the right way, it can make you a lot of money. Feel free to visit nettiluotot.fi for more tips on investment and capital loans.

Disclosure: I do not own any shares of any stocks mentioned in this article.

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