Why ‘what might have been’ would often not have happened
Implicit in the ‘what might have been’ of buying a spectacularly successful share 20 years ago is the idea you could hold onto it that entire time when the reality, explains author and investor Taylor Pearson, is otherwise
‘What might have been’ may hold some merits for investors as a hypothetical exercise but, practically speaking, it is more likely to be a source of pointless regret. “Anyone investing in Amazon in 1999 would have ...” No, let’s stop that wistful line of reflection right there and, in the company of author and investor Taylor Pearson, think a little harder about just who that hypothetical investor would actually have been.
“In practice, the type of person who was buying Amazon in 1999 was probably working in tech, they were probably buying it on margin and they probably owned a lot of other risky tech stocks that have not done well over the subsequent 20 years,” notes Pearson while discussing the concepts of ergodicity and ‘average returns’ on a recent episode of The Value Perspective podcast.
“And they probably blew up well before they could realise the returns of Amazon because, from 1999, the share price collapsed more than 90%. Or else they had other things happen in their life – for example, they might have been working at a technology company and got laid off after the tech bubble burst in 2000 and then were forced to liquidate their investments because they needed the cash at that time.”
In other words, implicit in the ‘what might have been’ of buying Amazon in 1999 is the idea our hypothetical investor was in a position to hold onto the shares for a further 21 years – and the reality, Pearson argues, is that very few could have. Indeed, when we touched on similar ground back in 2014 in Long run, Forrest, long run, our example of a hell-or-high-water, ultralong-term investor came from the world of fiction.
Forrest Gump recently made another appearance, here on The Value Perspective, when we argued, in some instances, “it’s better to be bobbing out at sea with a bit of volatility rather than risk being hammered against the harbour walls during the storm”. Six years ago, however, it was Gump’s unconventional approach to investing, not shrimp-fishing, that prompted our analogy.
“Lieutenant Dan got me invested in some kind of fruit company,” recalls Gump at the bus stop. “So then I got a call from him, saying we don’t have to worry about money no more. And I said, that’s good – one less thing.” Good for Forrest but, as Barry Ritholtz argues in his great 2014 Washington Post piece, The world’s greatest stockpicker? Bet you sold Apple and Google a long time ago, he was likely to be in a minority.
The article addressed the question of whether having the ability to pick out the most successful stocks of the future when they floated might be the path to untold riches. It would have been a pretty dull read if the answer had been ‘yes’ but of course it was not – being able to spot winning businesses from the start does not mean you are wired to keep hold of them for their entire journey to the top.
For one thing, as Ritholtz points out, Forrest’s “fruit company” Apple lost 25% or more of its value on six occasions in the decade to 2014 alone and, in its worst week, fell 51%. As we suggested in our piece at the time, the only way any investor could ever stick with a stock through those sorts of gut-wrenching falls would be if they had forgotten, or were unaware, they owned it.
Equally, as Ritholz also notes, it would be almost impossible to stick with them through their mouth-watering highs. Say, 20 years ago, you invested £10,000 in a portfolio of 10 stocks, including Apple, and still held them now, then your portfolio would, to all intents and purposes, be Apple. Could you really stomach a 50% drop in its shares today compared with when it was just a tenth of your wealth?
For all these reasons, then, investors need to be careful when somebody tells them they would be rich, if only they had bought Apple, Amazon or whatever it may be and then hung onto it regardless over the years that followed. And particularly so if, as can often be the case, such a ‘what might have been’ is the prelude for somebody telling you what you should buy now.
As Pearson observes in our podcast, you see this a lot in the context of passive investing while, here on The Value Perspective, it brought to mind the market’s fondness for so-called ‘bond proxies over the last decade. These are stocks in sectors such as consumer staples and tobacco that are traditionally viewed by investors as stable – even ‘safe’ – and have enjoyed an extraordinarily good run since the 2008/09 financial crisis.
As a result, these businesses have been trading on uncharacteristically high multiples, which – to our way of thinking – rather detracts from their traditional image of stability. Nevertheless, their supporters often look to justify their continued ownership by looking back at past performance – always a problematic exercise in isolation – before extrapolating this success forward over, say, the next 20 years.
No margin of safety
And it may well be that, in 20 years’ time, bond proxies will indeed turn out to have rewarded their supporters’ faith – as we never tire of saying, here on The Value Perspective, the future is unknowable. Nevertheless, those who have been building a portfolio of bond proxy stocks on historically high multiples have left themselves very little in the way of a margin of safety.
What that means is if, at some point and for whatever reason, the results of these businesses do not live up to their high expectations and associated high valuations, then their share prices will see significant drops. At which point, it really does not matter how well they have done by 2040 – much like our hypothetical Amazon investor, it will have proved hugely difficult to have kept with the stocks to enjoy ‘what might have been’.
Juan Torres Rodriguez
Research Analyst, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
Fund Manager, Equity Value
I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst.
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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