Hendrik Bessembinder: you might not know his name, but everyone in fund management does. Scottish Mortgage’s James Anderson first told me about him three years ago. Until then, Bessembinder had been a relatively obscure academic, then he published a paper that backed up every hunch Anderson had ever had. The paper concluded that, over the long term, all the returns from the US stockmarket came from 4% of listed companies. The rest are pointless. Take that internationally (he did another study a few years ago) and it falls to 1%.
You could respond to this information by admitting you haven’t a hope of figuring out which stocks will make up the 1% – or the 4% – and so just buy everything and hope for the best. Hello passive investing. However, you could also do what Anderson (and the firm he is soon retiring from, Baillie Gifford) has been doing for many years and, as Robin Wigglesworth puts it in the Financial Times, take it as affirmation that one should invest aggressively and for the long term in “a narrow clutch of potential superstars – almost whatever the price”. Even if most of your picks end in disaster, “finding just one of these nascent stockmarket titans can more than compensate for losses elsewhere”. It sounds great – intellectually stimulating, hugely supportive of the creativity of capitalism, potentially very lucrative and pleasingly long term (all fund managers like to say they focus on the long term). Buy, hold, wait, win. What’s not to like?
How about extreme overvaluation? Bessembinder’s disciples will say that valuation doesn’t matter: however much you pay for the greats in the short term, you will never price in their full wonder over the long term. Maybe that is absolutely right (his data suggests it is), but in the shorter term, price matters. And if you have to pay a bonkers-looking bill to hold gung-ho growth which throws off no cash, but not-very-much-at-all to hold something mediocre which offers a rising dividend, then might there be a shorter-term argument for holding the mediocre – particularly in a time of obvious inflation risk? (US inflation rose at its fastest pace in more than 12 years in April, a trend we suspect will continue.)
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Money has poured into “disruptive” technology businesses all chasing the same “profitless sales” in the last decade, says Argonaut’s Barry Norris. It’s been fun, but in an inflationary regime, will investors have the same patience with their failure to produce much actual cash as they have had up until now? It seems unlikely (see the 28% fall in Shopify shares, for example).
Anderson would look at, say, oil and energy stocks, and say the clock is ticking: time and disruption are their enemies – they’ll be gone in 30 years. Maybe so, but they are also the ones with obvious pricing power right now. Real companies making real things and real money – money they can pay out to you as it comes in. We’ve all done well following Anderson’s ideas. And over the very long term we probably will again. But for now? Norris reckons there’s a multi-year boom underway in mining, steel, housebuilding, transport and semi-conductors, all sectors you can buy right now on “mediocre” valuations. Think more short term, says Norris. Buy, wait a bit, sell, win.
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