Market View

To fad or not to fad?

As analysts and investors, we focus on the long term, which means we both want to ignore fads, but also embrace the ones that become much more.

Investing fads
Russell Harrop, Head of International Equities

I like to think of myself as experienced rather than middle-aged, even though my own parents seemed ancient when I was my kid’s age (though they were in fact a decade younger!). However, I can’t help but feel more than a little old when I find myself shaking my head at the latest fad while thinking I’ve seen it all before. The problem is: some fads break out and simply become ‘things’. It’s not easy to identify even with hindsight why some fads fade while others thrive, and oftentimes it’s the same with successful companies. For example, does Tesla make half a million vehicles because it was just in the right place at the right time , rather than General Motors with their EV1 back in the 1990’s? Or was it something specific about its founder, technology, and investors?

As analysts and investors, we focus on the long term, which means we both want to ignore fads, but also embrace the ones that become much more. Was it obvious at the time that online shopping would be the default for almost everyone? Maybe, maybe not. I definitely remember being sceptical of mobile phones when they were the size of a brick and wondering why anyone couldn’t just wait until they got home to call someone. Financial and accounting fads though, do seem to come and go and I was reminded of that just this week when re-analysing a company.

Zero-based budgeting (ZBB) was for a short while the holy grail. In essence, it involved budgets for divisions starting at zero and every single item of cost having to be justified before it could be added to the budget for the following year. And guess what happened? Costs collapsed and profitability blazed brightly, allowing companies to load up on debt and pay huge dividends to their owners. Step forward four years from when management of the company I’ve been revisiting were being beaten up for not following ZBB and where are we? Purveyors of ZBB are drowning in debt just as interest rates go up and up and they have discovered that when you sell soup and beer with tiny advertising budgets, you don’t sell much soup and beer after all. The bright light of high returns barely flickers now.

It is painful to see plenty of stocks go from the height of fashion to out of fashion over just the last seven months, as the market frets about growth and the possibility of recession. Amazon’s share price has fallen more than 25% in nine quarters since it listed in 1997. Indeed, it has fallen in a third of all the quarters since listing. However, providing growth over the medium to long term continues to come through, this is ultimately what will decide the direction of Amazon and other companies’ share prices over time.

We will miss plenty of fads, and plenty of ones that turn out to be much more, but by focusing on, and really truly thinking about where a company might be in ten or fifteen years’ time, we stand a good chance of ensuring your money is in the right kind of companies that can compound away.

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