"Where we're going" - Creative destruction helps generate long-term returns for investors
As the world celebrated ‘Back to the Future’ Day on 21 October 2015 – the date to which Marty McFly and Doc Brown time-travel forward 30 years in the second instalment of the Back to the Future trilogy – we were stirred to dwell, in Time and again, on how a value strategy helps cope with the uncertainties the future inevitably brings to investing. What else then might the films have to say on the subject?
While Back to the Future contains a number of things we can only dream of having at our disposal – the ability to go back in time, for example, or a book that tells you where to put your money or hoverboards (it is not all work, work, work on The Value Perspective and this YouTube clip has really whetted our appetite) – one of its principal themes is something we deal with every day.
That is the interaction of the past, the present and the future – essentially, change – and can be neatly illustrated with the four key dates used across the trilogy. In 1885 then – when Doc ended up stranded in the Wild West – the oldest stockmarket index currently still in use, the Dow Jones Transportation Average, was marking its first birthday.
The initial roll-call for this forerunner of the Dow Jones Industrial Average featured just 11 names, nine of which were railroad companies. In 1885 itself – no doubt at least partly in a bid to compete with those nine – no fewer than 40 railroad companies were launched. It is a safe bet that few such businesses from that era, let alone the 1885 vintage, exist in their original form in 2015.
Other types of transportation business have of course since evolved to take the place – and market – of the railroad companies. This process of ‘creative destruction’ can also be seen in the evolution of the Fortune 500 list of US companies with the largest revenues, which happens to have been first published when Marty was inspiring Chuck Berry in 1955. Just a tenth of the business that featured then also appeared on this year’s list.
1985, when Marty first test-drove the DeLorean, helps illustrate how the forces of creative destruction are speeding up as it also marked the birth of Blockbuster Video. Sold for $18.5m (£12m) in 1987, the business was bought by Viacom just four years later for $8.4bn (£5.4m). The undisputed leader in video rentals at that time, Blockbuster later built a less impressive reputation as the undisputed leader in late fines.
Poetically enough, this policy helped sow the seeds of the firm’s own downfall as, stung by a $40 fine for the late return of Apollo 13, customer Reed Hastings went on to found Netflix. Blockbuster even managed to pass up the chance to buy Netflix in 2000, electing instead to team up with Enron Broadband Services. Needless to say, that did not end well. Blockbuster itself filed for bankruptcy protection in 2010 and its name now survives largely as a cautionary tale.
In contrast, Netflix has gone from strength to strength and, as a global success story from the dotcom era, now stands in 2015 – our present and Marty’s future – as a beacon of hope for all the ‘unicorns’, about which we have raised an eyebrow in articles such as Hit and myth. A few may scale the heights of Netflix or Amazon but many more will emulate the ‘Boo’, ‘Pets’ and other failed ‘dotcoms’ of 2000.
All the businesses mentioned in this piece are US companies and yet, despite the various tales of woe, the past 130 years have seen the US market produce inflation-adjusted returns of 6.6% per year. This is the power of creative destruction and, while plenty of stocks that are listed today will not make it to 2115 or even 2055, others will spring up to take their place and generate fresh returns for investors.
Changing with tastes, with technology and with the times, the market will continue to evolve alongside the economy and, over the longer term, it is likely to move significantly higher. Even so, there will be good and bad times to invest and, while you may not have access to a time-travelling DeLorean to guarantee successful investments, you can always stack the odds in your favour by doing it the value way and buy the market when it is cheap.
Fund Manager, Equity Value
I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials. In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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