For super funds and their advisers

Don’t take blue chips for granted: Marks


Today’s investors are “riding for a fall”, according to Oaktree Capital founder Howard Marks. Markets could well be in for a repeat of the Nifty Fifty.

When Howard Marks was just starting his career in finance in 1969, the preceding 20 years had been “a “mostly unchanging backdrop… in front of which events and cycles played out.” Today, “everything seems to change every day” – and Marks believes that investors can’t take anything for granted.

“It’s particularly hard to think of a company or industry that won’t either be a disrupter or be disrupted (or both) in the years ahead,” Marks wrote in the most recent of his widely read investor memos. “Anyone who believes all the firms on today’s list of leading growth companies will still be there in five or ten years has a good chance of being proved wrong.”

The historical underpinning of his view on disruption today comes from the “Nifty Fifty” companies like IBM, Xerox, Kodak. While many of them were titans in their respective industries, they were still smoked by disruption. For Kodak and Polaroid, that disruption was digital cameras; for IBM, it came in the form of decentralised computing. The Nifty Fifty “represented the first flowering of change in the new world, and many of them went on to be its early victims.”

“It was widely believed that nothing bad could happen to these companies and they could never be disrupted,” Marks wrote. “This was one of post-war America’s first major brushes with newness and – in a good example of illogicality – investors embraced these companies, with their revolutionary newness, but somehow assumed that a newer and better new thing could never come along to displace them.”

“Those investors were riding for a fall. If you bought the stocks of “the greatest companies in America” when I started working in 1969, and held them steadfastly for five years, you lost almost all your money,” Marks wrote. “The first reason is that the multiples in the late 1960s were far too high, and they were gutted in the subsequent market correction. But, perhaps more importantly, many of these “forever” companies turned out to be vulnerable to change.”

Investors in recent years have certainly spent more time focusing on the prospects of the “super freaks” – “tech” companies like WeWork, Tesla, and Peloton. The success of powerhouse companies like Apple and Facebook is essentially priced in.

“For investors, this means there’s a new world order. Words like “stable,” “defensive” and “moat” will be less relevant in the future,” Marks wrote. “Much of investing will require more technological expertise than it did in the past. And investments made on the assumptions that tomorrow will look like yesterday must be subject to vastly increased scrutiny.”

But perhaps more interesting than Marks’ musings on the nature of change and innovation are his views on deflation, which see a brief cameo from ARK founder Cathie Wood. Wood believes that inflation is unlikely to be anything other than a flash in the pan, and that deflationary pressures will emerge from five key platforms: DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology.

Wood acknowledged that technology would lead to job losses, acknowledging a 2014 study by Harvard University that estimated that 47 per cent of US jobs would be lost to automation and artificial intelligence by 2035.

But Wood believes they didn’t “finish the story” – and that, as productivity goes up as a result of automation, wealth and GDP creation will also increase (there is the unanswered question of how that wealth is distributed – potentially through the controversial idea of a universal basic income).

“I want to spend a minute on exactly what Cathie Wood said: technology will prove deflationary, and its positive impact on productivity will contribute to a jump in GDP. But GDP is the product of the number of hours worked times labour productivity per hour,” Marks wrote.

“Thus, if technology produces a big increase in output per hour worked, GDP can grow even if the number of hours worked declines. In other words, technology has the potential to boost GDP while adding to unemployment. We don’t hear much these days about the possibility of deflation, and it certainly seems unlikely to arise. We also don’t hear much about the deflationary impact of technology, but we shouldn’t dismiss the idea.”

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