Do we invest in themes?
In recent weeks we have been asked about thematic investing. We never just buy a theme. But we do love investing with strong thematic tailwinds at our backs. What is important for us, however, is that the theme we are buying is underappreciated by stock prices.
Remember the 3D printing industry which was growing at astronomical rates years ago, many equity investors who simply “bought the theme” lost a lot of money. Why? Because they overpaid for stocks. Said another way, the expectations for 3D printing that were built into many stock prices were simply too optimistic. As these businesses underperformed expectations, their stock prices de-rated significantly.
The cybersecurity thematic
While we like strong tailwinds, is cybersecurity an area that we see having strong tailwinds and an area that we look at? We certainly agree there is a structural thematic and demand for cybersecurity. This topic of cybersecurity is not going away for any company around the world and for any government around the world. So clearly, there’s enormous demand.
Our concern with thinking about cybersecurity businesses and the merits of a potential equity investment in such a business, is that they are effectively black box businesses. How can we evaluate the quality of, or even differentiate between the different types of, cybersecurity offerings?
Furthermore, even if you believe you have identified a good cybersecurity offering, you must remember that this technology may well be going up against nation-states. Can the cybersecurity technology stand up against Chinese intelligence, Russian intelligence, or United States intelligence services? We think it is unlikely. So, there are just a whole lot of unknowables there.