• Consider using structural trends to help guide investment decisions

• “Perfect timing” is rare when investing

• Looking at the market with contrarian bias may help avoid emotion-driven mistakes

I believe one of the key elements of a successful investment strategy is determining structural trends. Several are at play including, but not limited to, demographic trends, healthcare trends and global debt imbalances. One which doesn’t seem to get enough attention is the development of consumer spending in Asia and the emerging markets coupled with changes in the spending behaviors of consumers in developed markets.

While investors tend to err in the timing of their purchases, investing into a structural growth trend can help mitigate the consequences. The green line in the chart below symbolizes a generic growth theme. The purple wave symbolizes the volatility of investor behavior toward that trend.

There are periods when the securities associated with the trend become over or undervalued. This may be caused by too much enthusiasm or exogenous shocks. Consider the investor that purchases a security at point 1. It may not be obvious at the time but the investor will become aware of “overpaying.” The investor may wish to take advantage of the tax loss, but there is also the comfort that the rising trend will probably create a “breakeven” point. If the green trend line was declining, the breakeven is significantly less likely to occur. It is possible to invest successfully into declining trends as investors tend to exaggerate the decline and therefore underprice the remaining, albeit declining, cash flows. I recall endless discussions about investing in Kodak as digital technologies began to cannibalize their dominant products. Clayton Chistensen’s excellent book “The Innovators Dilemma” illustrates how difficult it is for corporations to make the journey from one strategy/technology to another. Investing into declining trends requires time and expertise although distressed situations can provide large profits.

However, I prefer to invest with a contrarian bias within long-term growth trends. Point 2 represents the perfect entry point for purchase of securities related to a growth trend. Point 2 is created by markets in general turmoil or a hiccup in the specific trend growth story. While it is virtually impossible to get the timing as perfect as suggested by point 2, those with a contrarian bias are more likely to study the situation objectively and vote against the emotional selling wave.

Recent examples worthy of debate are investor behavior toward industrial companies exposed to growth in emerging markets. Was the slow down in economic growth in China a “hiccup” or not? We have also seen significant changes in investor behavior toward technology companies. Is Apple the next Sony or Nokia? With obesity having created demand for diabetes treatments, where are the associated securities on the purple wave? I suggest investors devote more of their time and intellect to these types of issues instead of trying to catch falling knives.

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