Love it or hate it, demographics matter for an investor (Part 2)

demograhics

This is part two of a two part post on the importance of demographics on one’s investment choices.  Part one addresses the perils of neglecting demographics, and today’s post will discuss investment ideas backed up by demographic trends.

The more sensible consumer mentality may also be applied to investments. For years, we have invested in trends that most people do not understand – many had little fundamental support behind it other than the sheer force of market momentum. The foolishness of that collective decision is reflected in overall market returns: during the past decade, the stock market has not treated us well.

Perhaps it’s time to look at investments that have the solid support of demographics and real demand behind it? Is it any surprise that during this crisis, Best Buy is down 47% and Family Dollar Stores are up 30%? Before the fundamental disarrays of the economy are addressed, it’s safe to say that products and services that meet essential needs will stick around. On a side note, would it also make a lot of sense to retrain those laid-off workers from the previous fluff economy in those fields that have long-term demands? Now going back to the idea of ongoing demands, here are some thoughts.

Follow the demands of the aging population and pay attention to healthcare related companies not run by crooks. In most of the developed countries, healthcare needs are hardly abating. The demands for various levels of medical care in the forms of doctors, nurses, medication, medical equipments, and assisted living will continue to rise every year. Yet the broken Medicare system in the US, along with issues of patents, the emergence of scandals and ethics quandaries related to the pharmaceutical industries, have tainted the industry reputation and sidetracked the dire issue on hand. But with pressing demands that will continue rising with time, it is an industry that demographers would pay close attention to.

As the most dependent existing source of energy, oil will not stay double digits for long. The financial crisis has all but rendered the discussion of oil price obsolete. But reality remains that once we pull out of this recession, the competition for oil will resume at an ever-furious pace. The Americans still need to drive, and the Chinese still need to run their factories. The fundamental demand equation has not changed. The recession compounds the supply problem, as lack of credit and falling oil price has lead to many downstream oil drillers to halt operations. Macroeconomic uncertainties, crude price fluctuations and its consequently low break-even number have driven small and large operations to abandon exploration activities. Similar to the agriculture market, once demand picks up again, oil price will come back with a vengeance.

A corollary to the last point, alternative energy has no choice but to step up. Oil is a dwindling resource. So whichever way we spin it, this stuff is going to run out. And most likely sooner than we would like. At times of high oil prices and tight supply, R&D of alternative energy gets a boost. Now with oil at a fraction of what it was a year ago, the government and the general public has turned its focus on fixing more immediate malaises of the economy. Renewable energy talks are taking a backseat. But the issue of energy sustainability remains, and the solution rests with alternative energy. With employments in real estate and car manufacturing collapsing in the US, it would make a lot of sense for some of the newly unemployed to retrain themselves in, say, alternative energy engineering? This business will be around for the foreseeable future.

Invest in what “they” need. Many say that China and India will be the largest consumers in the 21st century. Given the American and Japanese experiences with consumerism, I’m not sure that’s something they would want for themselves. But remember our truism about wants versus needs, and focus on giving them what they need.

Off the bat, food related products including wheat, rice, beans, dairy, meats are essential. Rising living standards demands better food. These foods must come from limited farming regions. Agriculture is one of the most neglected industries in the past two decades. So invest in agriculture. This might sound slightly exaggerated: but who knows, maybe farmers will drive Lamborghinis in the future, not brokers.

Farming aside, industrial materials are also needed to meet the ongoing demands of industrialization in those parts of the world. All classes of commodities will be in short supply, so the temporary slump in commodity prices is just waiting for a jumpstart for another upward trajectory. Some are already taking advantage of low prices by stockpiling them. Too bad the needs are ongoing, and demands will still be there when the market turns the corner. It’s safe to say that businesses positioned to sell to countries like China and India are those that will succeed in the 21st century.

Water is another over-looked group. Farming, industrialization, urbanization, and improving living standards have led to a shortage of water in China and an even more serious shortage of clean drinking water. Water supply and conservation, purification, sewage treatment, industrial bleaching, there are so many needs that the government can’t keep up. Expertise in how to do one or all of the above in ways that are safer, more efficient, less costly, and less environmentally disruptive, will also find itself highly sought after.

picture source: ~avotius

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  • http://onemint.com Manshu

    The point about India and China reminds me of what a large retail store operator told me once.
    He said that when they were planning to enter the tier 2 cities and rural areas in India — they did an extensive market research to see what kind of stuff will sell there. All their results were proven wrong when they actually set shop. It seems that the stuff that they sold in rural India and urban India was about 95% same!

  • http://onemint.com Manshu

    The point about India and China reminds me of what a large retail store operator told me once.
    He said that when they were planning to enter the tier 2 cities and rural areas in India — they did an extensive market research to see what kind of stuff will sell there. All their results were proven wrong when they actually set shop. It seems that the stuff that they sold in rural India and urban India was about 95% same!

  • http://investoralist.com Dana

    Yes, funny these market researches. Purchasing behaviours are so radically different from the west that expectations of what constitutes “luxury” goods changes.

  • http://investoralist.com Dana

    Yes, funny these market researches. Purchasing behaviours are so radically different from the west that expectations of what constitutes “luxury” goods changes.