To invest in growth successfully requires both a long investment horizon and the stoicism to stick with it, especially when horizons shorten.
Importantly, clients of growth investors need to exhibit the same quality – there is plenty of evidence that style and returns-chasing by investors is far more damaging to individuals’ returns than the rotation of growth versus value or indeed other style categorisations.
One of the most under-appreciated characteristics of stock markets is that in the long term, market-wide returns are driven by an incredibly narrow range of companies.
Research shows that most stocks – whether value or growth at any particular time – simply do not contribute much in terms of lifetime returns.
From 1990 to 2018, if you had bought and held every available stock in global stockmarkets, 61 per cent of them would have returned less than a US Treasury Bill.
Only 38 per cent did better, offsetting the losses of the first 61 per cent. But the truly astonishing statistic is that the top 1.2 per cent of companies increased in value by an amount equivalent to the entire rise in global stock markets over that time.
If you can find a manager who can trade stock valuations better than average then this narrowness doesn’t matter all that much, as market fluctuations will certainly offer timing opportunities.
Identifying the world-beating companies
But for long-term buy-and-hold investors with no skill in market timing – that would be us – very few companies are really all that interesting.
It’s not about growth or value, it’s about trying to identify the very, very small number of companies that have the potential to be truly world-beating. Is that even possible?
Of course, it’s not easy and those who try to do it will be wrong a lot, because we are trying to see five-10 years into the future and beyond.
But we think such companies do have common characteristics: quality, resilient management with very long horizons (often still founder-controlled), cultural strength, large and flexible application of their technologies and business models, and much higher than average R&D spend.
Some of those companies will multiply their earnings many, many times and, in the long run, it is this which drives portfolio returns – not style, not macroeconomics, not interest rates and not inflation.
Our world is still in the foothills of applying synthetic biology, artificial intelligence and personalised medicine to real-world problems, and the energy and e-commerce revolutions have far to go.
Valuations of companies in those areas will fluctuate, but those that execute well and achieve worthwhile margins will drive stock market returns.
