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Rational Exuberance - The Equitile Blog

9th March 2021

Posted by: Andrew McNally

Eternal Adaptation

It’s five years since we wrote our inaugural investment letter, Eternal Adaptation.  In it, we cited the corporate mantra of one of our first investments, a packaging company called Sonoco, “Change is an immutable law: eternal adaptation is the price of survival”. While many in the investment management industry consider a “buy and hold” investment philosophy to be a badge of honour, we believe it neglects the reality of economies and markets. As this thirty-year history of the US market shows, industries wax and wane, some arrive afresh and others disappear for good.

 

Moreover, as we wrote in Revival of the Fittest (2016), companies are living faster and dying younger. The average tenure in the S&P500 in 1960 was more than sixty years, today it’s closer to ten. Moreover, the concentration of cash flow amongst just a few companies is stark and the companies earning that cash flow are changing ever-more quickly.  Between 2000 and 2015 less than 60% of companies in the top fifty by cash flow managed to stay there the following year. The odds, on that basis, of staying  in the top-fifty cash earners for the whole fifteen years was 2,700:1 against. One should be more attentive than ever to a rapid change in fundamentals.

The lesson is simple but often neglected. Buy-and-hold is a comforting mantra, adapt-to-survive is more realistic.

As the chart shows, technology has been the biggest show in town for many years. In recent weeks, there’s been some reversal – the “old economy” heavy Dow Jones Industrial index has outperformed the tech-heavy Nasdaq by 11% in the last month for example. Does this mark a long-term change in market leadership? Possibly. If it does persist then we, at least, will adapt to the new regime.

 

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21st August 2020

Posted by: Andrew McNally

In these precedented times

He spoke with a certain what-is-it in his voice, and I could see that, if not actually disgruntled, he was far from being gruntled.” P.G. Wodehouse, The Code of the Woosters

Most media I read and hear these days talk about these “unprecedented times” as if none of what we witness today has been seen before.

I wonder if its more to do with language than reality though. Some words just work well in pairs when it comes to describing events - unforeseen circumstancesunchartered waters - but precedented times, for some reason, doesn’t have the same ring.

As George wrote a couple of years back in The Anxiety Machine – The end of the world isn’t nigh, the tendency of the press to report news in an overly dramatic fashion, generally with a strong negative bias, is natural. As humans, we suffer a powerful cognitive bias towards overly dramatic, overly negative narratives. We have evolved to survive and so will always be more attentive to threats than good news. It is only natural, therefore, for the attention hungry media to focus on negative stories during these “unprecedented times”.

Although the combination of events in 2020 is unique, none of them on their own are materially different from anything we have witnessed in the last 100 years. A browse through the history behind our long-range US stock market chart (just scroll over the lines) reveals the never-ending barrage of fear which investors face. War, natural disasters, pandemics, mass unemployment, trade wars, debt fears, political crises, military coups, despots, and obsoletion all feature. So, however, does human endeavour, enterprise, new technology, global collaboration and the economic enfranchisement of huge swathes of the fast-growing global population.

The lessons from this simple chart are clear. Despite the news, stay invested for the long term and, whenever possible, re-invest dividends (click on the Linear button for the full effect).

None of what we see today is without precedent. For sure, we are witnessing an unusual cocktail of economic and political phenomena but perhaps they would be better described, in the spirit of P.G. Wodhouse, as merely a little less than precedented.

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