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markets

The Big Five

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Investors love good stories and in recent years, many of these stories have centered around innovations that have fundamentally changed the way we live our lives.  Some examples might include the release of the original Apple iPhone in 2007, the delivery of Tesla’s first electric cars in 2012 and the launch of Amazon Prime’s same-day delivery service in 2015.

No doubt, many of you will have had conversations with friends and family around the successes, failures, and prospects of some of the world’s largest companies and the goods and services they offer.  In this article, we take a deeper look at the ‘Big Five’ tech companies – Amazon, Apple, Alphabet (Google), Facebook and Microsoft – through the lens of the long-term investor.

The ‘Big Five’, images from Unsplash [1]

In what has been a turbulent year thus far, some larger firms have come through the first, and hopefully last, wave of the ongoing pandemic relatively unscathed.  Those investors putting their nest eggs entirely in any combination of the ‘Big Five’ would appear to have done astonishingly well relative to something sensible like the MSCI All-Country World Index, which constitutes 3,000 of the world’s largest companies.  At time of writing, Amazon’s share price has faired best, increasing 75% since the beginning of the year.

These types of firms tend to struggle to stay out of the headlines for one reason or another.  Perhaps as a result, many of the investment funds found in ‘top buy’ lists have overweight positions in one or more of these companies.  Many of today’s most popular funds are making big bets on one or more of these companies, anticipating that the past will repeat itself moving forwards.

Sticking to the long-term view

The challenge for these managers, and others making similarly large bets, is that these are portfolios that will be needed to meet the needs of individuals over lifelong investment horizons, which for the vast majority of people means decades, not years. With the benefit of hindsight, managers who have placed their faith in these companies have stellar track records since Facebook’s listing on the market in 2012.

However, an interesting exercise would be to investigate the outcomes of these companies over a longer period of time, for example 30-years seems more prudent. This is somewhat difficult given that 30-years ago, 3 of these companies did not exist, Mark Zuckerberg of Facebook was 6-years old, Apple came in at 96th on Fortune’s 500 list of America’s largest companies and Microsoft had just launched Microsoft Office.

A partial solution to this problem is to perform the exercise from the perspective of an investor in 1996, which is the start of Financial Times’ public market capitalisation record.

The ‘Class of 96 Big Five’ consisted of General Electric, Royal Dutch Shell, Coca-Cola, Nippon Telegraph and Telephone and Exxon Mobil.  A hypothetical investor with their assets invested in either Coca-Cola or Exxon would have just about beaten the market over this period, those in Royal Dutch Shell, Nippon Telegraph and Telephone and General Electric were not so lucky.

This exercise is illustrative only, however a closer look is enough to see that almost no investor would want to stomach the roller coaster ride they would have been on in any one of these single-company portfolios.

Summary

The beauty of the globally diversified, systematic approach adopted by Wells Gibson, is that judgemental calls such as these are left to the aggregate view of all investors in the marketplace.

No firm is immune to the risks and rewards of capitalism; be it competition from Costco or Walmart taking some of Amazon’s market share, publishing laws causing Facebook to apply heavy restrictions on its users or some breakthrough smartphone entering the marketplace that is years ahead of Apple – remember Nokia?

Rather than supposing that companies who have done well recently will continue to do well, systematic investors can rest easy knowing that they will participate in the upside of the next ‘Big Five’, the ‘Big Five’ after that and each subsequent ‘Big Five’.

Those who can block out the noise of good stories and jumping on bandwagons are usually rewarded over time.

“But the problem that people don’t understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they’re not really active. They have to make bets. What that means is there’s a huge dispersion of outcomes that are totally consistent with just chance. There’s no skill involved in it. It’s just good luck or bad luck.”

Eugene Fama – Nobel laureate

Billions Wiped Back onto Pensions

By | News & Views, Pensions | No Comments

This was not a news headline, nor will it be a headline we will ever see.

Yet this is exactly what happened on Tuesday this week.  The FTSE100 had its biggest rise ever, and the Dow Jones in the US went up by more than 11%, the biggest daily gain since 1933.

Our news doesn’t report this.  Good news doesn’t sell, sadly.  Sensationalist, bad news is what we hear when billions are wiped off the value of our pensions.  No big deal apparently when billions are added to our pensions.

Are we out of the woods?  We don’t know – it seems unlikely, as the economies of the western world have shut shop for three weeks, minimum.  We would be surprised if we don’t see further volatility in the days and weeks ahead, but who knows?

Tuesday’s rises demonstrate one thing very clearly, that is, when markets move, they often move very fast, and very unexpectedly.  Trying to time it is very difficult; we would say it is impossible, without a lot of luck.  It’s why we stress to all our clients that it’s time in the markets, not timing the markets that matters.

Many people have been asking, are markets at their lowest, have they bottomed out?  Who can say? The truth is, no one knows with 100% certainty.

What is absolutely certain is that shares in the great companies of the world are available for purchase at a significant discount from six weeks ago.  Also, it’s worth highlighting, with a high degree of confidence (although not certainty), that the price of shares in the great companies of the world will be higher in five years than they are now.  That’s all that matters; all else is noise and distraction.

One last point, knowing how the news reports on capital markets does make me wonder how good or bad things really are when it comes to other world events.  Perhaps, worthwhile, switching off the news!

As ever, please do get in contact if you need our help.  Our great team will do its best to help us all get through this together.

Please note that past performance is not a guide to the future, the value of an investment and the income from it could go down as well as up. You may not get back what you invest.

 

Today’s Market Falls in the Context of History

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It’s been another tough week for capital markets however, context is an extremely important tool when it comes to investing.

All investors around the world will be feeling the emotional pressures of the recent rapid equity market falls, either because they can remember previous falls and times of uncertainty, such as the Global Financial Crisis (2007-2009), or as younger investors, they have not yet experienced material market falls.

We obviously cannot see into the future, however the global equity market falls we have seen since January, of under 20% or so at the time of writing, sit well within previous falls since 1970.

In terms of expected ranges of outcomes, we generally estimate that 95% of the time annual equity market returns should sit within an approximate range of + 45% to – 35% albeit outliers do exist beyond these limits.

The table below provides numbers around both the depth and recovery times for each of the five largest falls since 1970.

Peak dateDeclineTrough dateRecovery dateDecline

(months)

Recovery (months)
Sep-00-49%Jan-03Dec-102995
Jan-73-40%Sep-74Jan-762116
Jan-90-35%Sep-90Jan-93928
Sep-87-29%Nov-87Mar-89316
Jan-70-19%Jun-70Jan-7167
Jan-20-19%

How deep or long the current fall will be, no-one knows.

There will certainly be more rises and falls to come.  Yet we should take some comfort from the fact that things have been just as challenging at times in the past, albeit for very different reasons.  Recovery times sit well within the investment timeframes of most investors.  It is worth noting that an investor in global equites today has, in nominal terms, more money than they did at the end of April 2018, despite the market falls in late 2018 and those recently experienced.

These are tough times for all of us and for our Nation, but the words of wisdom that we always return to at these times are those of the legendary investor John Bogle, “This too will pass.”

This will pass and from an investment perspective, the key message is to be brave and disciplined as a fall only becomes a loss if we sell.

Remember, we are always available to take your call or answer your emails.  Please feel free to contact Wells Gibson, if you have any specific questions or simply if you would like some reassurance.

Photo by Jerry Zhang on Unsplash