Seven lessons from 20 years of investing
Once upon a time, General Electric (GE) was the most valuable company in the world. Founded by Thomas Edison in 1889, it was one of the original 12 stocks in the Dow Jones Industrial Average. By late 2000, GE had a market capitalisation of half a trillion dollars. It had diversified into manufacturing, power generation, media, health and finance. Jack Welch, its CEO, was a business superhero who wrote several best-selling books about leadership.
These days, GE is a mess. Many of its businesses have imploded, it has lost almost 90 percent of its value, and it’s become a case study in poor business management. The world has shifted in the last 20 years. GE got left behind.
This was an extraordinary period for investors. Much about investing has changed, but a great deal has stayed the same. Let’s begin by looking at three long-term investment principles that have come through rather well.
1. Buy, hold, grit your teeth
Most investors have long time horizons, whether they realise it or not. If you’re 45 years old, say, you can expect to live into your eighties and beyond, if all goes well. You should be taking a decent amount of investment risk to maximize your returns over your lifetime.
That means buying and holding equities. Since 1900, world equities have returned about 5% per year after inflation. For bonds, the number is 1.9% per year, while cash is on 0.8%. Equities have won by far.
Yields on government bonds are now low or negative in much of the world. You buy a bond expecting to lose money after inflation. So it’s even more important to hold lots of equities. But investing in stocks is not smooth. Much of the time, they’re below their highs and you feel anxious. And you might be tempted to cut your losses when markets are plunging and most of your holdings are in the red.
That is usually a mistake. We’ve had three huge market crashes in the last two decades: 2001-02, 2008-09, and earlier this year. All were glorious buying opportunities. Long-term investors have time on their side. They should try not to panic in tough times… and aim to buy, rather than sell.
2. Spread your risk
Forecasting is hard. It’s hard to predict who will win the US election this year, let alone which companies or markets are likely to succeed over the next 40 years. So long-term investors should diversify. Buy some of everything and you won’t go far wrong. If you spread your risk across lots of markets you will usually perform just fine.
Not diversifying is dangerous. The more concentrated your portfolio, the higher the risk that it can go horribly wrong.
We’ve seen lots of examples of this in the last 20 years. World equities have done well, as have world bonds. But many large stocks like GE have crashed, as have some popular equity themes like banks, solar energy and uranium.
3. Don’t listen to doomsayers
Most news out there is gloomy. Negative headlines hit you in the face. Negative headlines sell papers and generate clicks. We’re more likely to read an article about the impending collapse of the global financial system than one saying that investors are likely to do quite well in the next decade. But the latter outcome is far more probable.
In the last 20 years I’ve heard many forecasters predicting financial disaster. Thus far, they’ve all been wrong. I have a sneaking suspicion that none of them are rich. But they continue to get lots of attention in the media, despite their appalling track records.
Investors are too scared most of the time. The disasters they fear rarely happen. Y2K (remember it?) was a non-issue, the global financial system survived 2008, the euro has not split up yet, we will get over COVID-19. Humanity tends to muddle through in the long run. Don’t get bogged down by the negativism. And here are three ways in which investing has changed:
4. Madness has become normal
Negative interest rates. Rule by tweet. Lockdowns. Apple more valuable than the FTSE 100.
Lots has happened in the last 20 years that would have seemed inconceivable in the 1980s, and goes against the economics textbooks. Sometimes it feels as though the world has gone mad.
The world is wilder than we can imagine. We should expect many more mad surprises in the near future – both good and bad.
5. The internet is an unprecedented disruptor
New technologies always disrupt old ways of doing things. Usually this happens fairly slowly, and often within an industry, as when cars displaced wagons in the early 1900s.
But technological disruption has reached new highs in the last 20 years. Internet-based firms are changing the nature of modern business. Companies like Apple, Amazon and Google are reaching across the world and eating everybody’s lunch. And they’re still hungry.
Tech disruption will keep on going: think electric vehicles, renewable energy, meat grown in labs, artificial intelligence. Investors will need to adapt, or get left behind.
6. ESG has become mainstream
Twenty years ago, people who talked about environmental, social and governmental (ESG) issues in investments weren’t regarded as mainstream. You thought of hippies with long hair and sandals wanting to put the world to rights.
These days, ESG is becoming the norm. Why? Because taking such issues into account can help investors make better decisions. Well-governed firms and countries, for example, tend to beat their dodgy counterparts. Likewise, an environmental focus can highlight portfolio risks like extreme weather or stranded fossil fuel assets.
The world will go on heating up. And managers that don’t take ESG into account will look increasingly rusty.
7. Beware complexity
The investing world has become amazingly complex in the last 20 years. There are a myriad stocks, funds, derivatives and structured products. You can buy a Pet Care ETF that lets you “capitalise on people’s passion for their pets.” Or a 3X Long Tesla product that gives you three times the daily return on a Tesla share. Joy when Tesla rises, but you lose money three times as fast when it’s falling.
Does this immense range of products benefit investors? I’m not convinced. Much of the financial industry creates unnecessarily complex products, charges too much for them, and obscures the fact that they don’t deliver.
Hedge funds charging two percent per year and one fifth of the profits?! Don’t do it. Most investors are better off sticking to simple.
Seven Investment Management (7IM) is an investment manager partner of Wren Sterling.
Wren Sterling’s advisers recommend investments that align to our clients’ financial goals, while investment managers apply their expertise to managing the performance of those portfolios.