- Investors should resist the lure of themes like renewable energy or emerging markets. Companies rarely convert potential into actual earnings.
- Themes and stories simplify a complex world and encourage us to take on too much risk.
Many of you like to invest in themes such as green energy or specific emerging markets. This is dangerous.
The problem with these has been pointed out by Bradford Cornell at UCLA and Aswath Damodaran at New York University. They call it the big market delusion. Investors pay too much for companies which they expect to grab a share of a potentially huge market, be it renewable energy or India.