Are we overvaluing new stocks, and undervaluing the old?



Andrew Williams
Investment Director

New and old industries can each reward and disappoint investors – what really matters is the price at which you buy into them

At the start of the 20th Century, notes the 2017 Credit Suisse Yearbook, “virtually no-one had driven a car, made a phone call, used an electric light, heard recorded music, or seen a movie; no one had flown in an aircraft, listened to the radio, watched TV, used a computer, sent an email, or used a smartphone. There were no x-rays, body scans, DNA tests, or transplants, and no one had taken an antibiotic”.

In short, the world was a very different and far less technologically advanced place than it is today. And yet, of course, the discoveries and inventions of the 19th Century laid the foundations for so many modern industries, including electricity and power generation, automobiles, aerospace, airlines, oil and gas, pharmaceuticals and biotechnology, telecommunications and information technology.

The telegraph sector in 1900 was considered every bit as high-tech as Smartphones are today while it is hard to overstate the importance of the railroad industry 120-odd years ago – in the UK and, even more so, in the US. To underline that point, take a look at the following charts, which compare the composition of the UK and US stockmarkets by industry value, in 1900 and in 2017, and note rail’s dominance in the upper pair.


Industry weightings in the USA and UK, 1900 compared with 2017


Source: Elroy Dimson, Paul Marsh, and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and subsequent research


If these four charts look familiar, it may be because we used the 2015 versions in Track record when – among other things – we argued they served as a warning against investing too closely in line with a particular stockmarket index. Clearly industries change – as the Credit Suisse Yearbook points out, the 1900 list of companies includes the world’s then-largest candlemaker and the world’s largest manufacturer of matches.

By the same token, in 2017, a significant proportion of companies by value – 62% in the US and 47% in the UK – operate in sectors that were either tiny or non-existent back in 1900. Heading in the opposite direction, meanwhile, rail has slipped from 63% of the US market to less than 1% and from almost 50% of the UK market to almost nothing.

Focus on the new or stick with the old?

All of which begs the question as to whether investors should be focusing their attentions on the potentially exciting growth of the new or sticking with the old – after all, food, beverages (including alcohol), utilities and tobacco were all around in 1900 and a number have been among the world’s more successful industries in the years since.

Two years ago, the Credit Suisse Yearbook made the case that “both new and old industries can reward as well as disappoint”. What matters, it said, is not whether a sector involved a racy new technology or something rather more dependable but “whether stock prices correctly embed expectations” – in other words, whether investors buy into stocks when they are overvalued (bad) or undervalued (good) by the wider market.

Once again, the rail industry helps make that point. As we saw earlier, railroads have been, as the Credit Suisse Yearbook puts it, the “ultimate declining industry” in the US since 1900. Yet it adds: “Over the last 117 years, railroad stocks have beaten the US market, and outperformed both trucking stocks and airlines since these industries emerged in the 1920s and 1930s.”

The Yearbook goes on to argue: “If anything, investors may have placed too high an initial value on new technologies, overvaluing the new, and undervaluing the old.” And it concludes “an industry value rotation strategy” can help “lean against this tendency” and has historically generated superior returns. And yet, if the world is such a different place from 120 years ago, how has value remained a successful investment strategy?

It is because, over all that time and through all that change, one factor has remained the same. Us. As we put it in All in the price: “Human beings are the constant – markets are cheap when we are fearful; and they are expensive when we are greedy.” In a world where everything else is in a state of flux therefore, human beings are systematically exploitable – and value investing is the system.


Andrew Williams
Investment Director


The Value Perspective
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