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Future-proof portfolio: does it even exist?
Over a year ago, I spoke to a group of investors in Southern California. The point that I raised that drew the most attention was the challenge of the buy-and-hold forever approach to investing. Most value investors learned by watching Warren Buffett’s and Charlie Munger’s tremendous success buying stocks and keeping them forever. It worked well for those investing giants, but the next 50 years of the stock market might look very different. While researching the most successful families of the last 200 years for my book Money, Life Family I learned that not only change is the only constant, but that the rate of change has never been faster.
Let’s do a thought experiment. If you could choose a single stock to invest all your money in for the next 50 years, what would it be? Would you choose one of the largest, most admired companies of today? Looking back, in the 1920s your choice might have been RCA, in 1959 maybe Sears Roebuck, in 1987 maybe Kodak, in 2005 maybe GE. But with the exception of GE, those companies are all gone, and GE is only a shadow of its previous glory.
Did you know that among the 30 components of the Dow Jones Industrial Average (one of the oldest and best-known indices), only 3 companies have been members since before World War II? Meanwhile 24 out of 30 have joined the index in my lifetime (I’m just a few days over forty). 10 out of 30 have joined the Dow Jones Industrial Average since I started my career in 2005, including today’s market darling – Apple. If it retains that pace, the Dow will have refreshed completely during my lifetime within the next 5 years. Clearly, it seems the odds of any large company remaining successful for three to five decades is very low. It turns out that putting all your money in one single stock and blindly hoping for the best might be not be a future-proof investment strategy.
But what if, instead of buying one single stock, you invested long-term in 30 or 50 stocks? Could such a portfolio be future-proof? If you just pick the 30 Dow stocks, the prognosis isn’t good. Many former Dow listings have not only failed to grow wealth, but in many cases, they haven’t even preserved it.
So, if the ideal long-term investment vehicle isn’t a single stock, or even a passive portfolio of the market’s largest 30 companies, what could a potential more future-proof portfolio look like? We at Sicart have discovered that, as much as we love the idea of one-decision stocks (as Charlie Munger likes to call them), going forward the “buy and never sell” approach simply may not work. Looking at any company these days, we wonder if we could comfortably hold it forever. Even if it is still in business decades from now, it might be a shadow of its former self.
We also notice that the majority of the current stock market value is concentrated in fewer and fewer companies. These are companies that usually operate in winner-take-all markets. They have not only regional or national leadership in their industry, but global domination. That applies to the biggest among them: Apple, Microsoft, Amazon, Google, Facebook etc. The top 5-10 companies also collect the largest share of the profit pool among all corporations. There is nothing wrong with this per se, it’s the nature of the globalized economy we live in.
I believe the bigger trouble lies in the fact that these mega-cap, trillion-dollar companies are disruptors. They got started in dorms, garages, or basements, and took on well-funded, long-established competitors. They have done this by providing better value, service, or entertainment to the end consumer. But they’ve also accelerated the demise of incumbents, many of them prominent members of indices like the Dow Jones Industrial Average itself.
With that dynamic in mind, it’s not difficult for me to imagine this generation of disruptors being challenged by new ventures that may already be brewing in a dorm room somewhere. That’s something that tech executives see themselves. Not long ago, Amazon’s Jeff Bezos admitted that his company is not too big to fail; as a matter of fact, he said to Amazon’s employees that “Amazon will fail one day, but our job is to delay it as long as possible.”
In previous articles, I’ve discussed an infinite investment horizon, and finite assets. Managing family fortunes over generations, we think in terms of an infinite investment horizon rather than months, quarters or even years. We want to preserve and grow capital over generations. We like to think of our goal as doubling wealth every 5 to 15 years, which translates to a 5-15% annual return. The assets that the capital is invested in are finite – even Jeff Bezos acknowledges that. (Decades ago, Bill Gates himself shared his belief that tech companies should trade at lower valuations, given the constant change they face.)
If accelerating change, a winner-take-all environment, and likely challenges for tech giants weren’t enough to complicate long-term investing, there is also a confusion when it comes to valuing companies in the intangible asset economy. However, while we don’t know how long many of the great companies of today will be around, we do know that what counts in the end is their profits, and cash flows. Whether a business is concerned with bricks and mortar or cloud-based services, we believe it is its ability to earn proportionate profits that matter most.
Luckily enough, the top 5-10 companies we discussed earlier earn substantial profits. As a matter of fact, they claim a large share in total corporate profits of the top 100 or 500 companies. At the same time, though, we see a growing list of companies with very high market valuations, and no profit or even durable business models. The prime example used to be WeWork, which hasn’t come to the end of its troubles. From the outside, two $50 billion, $100 billion or $1 trillion companies may look alike. But while they are priced at the same level, their value may differ greatly. WeWork shareholders are still trying to figure out how much a money-losing behemoth could be sold for, and it will be likely a fraction of what we were made to believe we should pay for it in the public offering.
Is there such a thing, then, as a portfolio that we could call future-proof? Is it one stock, thirty of them, the largest, the highest priced? We believe it’s never been more important for investors to understand the difference between price and value. It’s also crucial to maintain flexibility, and adapt to change. This could mean moving wealth from one investment to another, frequently enough to avoid passively holding a stock while its value slowly dwindles. It is a challenge for most investors, but it may prove to be the most exciting time for true stock pickers. We believe we’re in an era when skills will matter more than luck.
We also believe that there is no such thing as a future-proof stock or stock portfolio. However, we do believe there is a future-proof stock investment philosophy: disciplined, patient, long-term value investing. To us, it means buying stocks for less than they are worth, waiting patiently for them to perform, and selling them when they become hugely overvalued. It worked in the 1930s for Benjamin Graham, it has worked for many investors since, and the odds are that it will work equally well for the rest of our investment careers.
Happy Investing!
Bogumil Baranowski
Published: 8/20/2020
Disclosure:
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.