Thematic investing frameworks have gained popularity in recent years, offering a way to invest in specific themes or trends. However, with so many frameworks available, it can be challenging to separate hype from substance. A thematic investing framework is an investment strategy that focuses on a specific theme or trend, such as sustainable energy or digital transformation.
The key to evaluating thematic investing frameworks is to consider several factors, including total addressable marketunit economicsadoption S-curves and valuation sanity checks. By carefully evaluating these factors, investors can make informed decisions and avoid investing in frameworks that are more hype than substance.
Evaluating Total Addressable Market
The total addressable market refers to the potential size of the market for a particular theme or trend. When evaluating a thematic investing framework, it’s essential to consider the total addressable market to determine the potential for growth. A large and growing market can indicate a strong potential for returns, while a small or declining market may indicate a weaker potential.
Assessing Unit Economics
Unit economics refer to the financial performance of a single unit or customer. When evaluating a thematic investing framework, it’s crucial to assess the unit economics to determine the potential for profitability. A framework with strong unit economics is more likely to generate returns than one with weak unit economics.
Understanding Adoption S-Curves
An adoption S-curve refers to the rate at which a new technology or trend is adopted by the market. When evaluating a thematic investing framework, it’s essential to consider the adoption S-curve to determine the potential for growth. A framework with a steep adoption S-curve is more likely to generate returns than one with a flat or declining curve.
Conducting Valuation Sanity Checks
A valuation sanity check refers to the process of evaluating the valuation of a framework to determine if it’s reasonable. When evaluating a thematic investing framework, it’s crucial to conduct valuation sanity checks to avoid overpaying for an investment. A framework with a reasonable valuation is more likely to generate returns than one with an inflated valuation.
To evaluate thematic investing frameworks, investors can use a scoring rubric that assigns weights to each of the factors mentioned above. By using a scoring rubric, investors can systematically evaluate frameworks and make informed decisions. Additionally, investors should establish kill-criteria to avoid investing in frameworks that are more hype than substance.
