In the 1989 movie Back to the Future II, Americans in 2015 drove flying cars and rode hover boards—but still used dot-matrix printers. Now, this movie was never meant as a forecast, so it can’t technically be considered wrong. Heck, a Delorean reaching 88 mph was a time machine, your cue to shut off the fact-o-meter. But that cars and skateboards are still earth-bound while printers use lasers (and some print in 3D) teaches a simple lesson: No one can accurately foresee what will happen in 10, 20 or 30 years. Today’s trends and hot frontiers don’t foretell what the world will look like decades from now—investing based on such factors is folly.
But that doesn’t stop some folks from trying. Recent advances in immunotherapy are driving excitement over the chance to cure cancer—and driving some folks into upstart Biotech stocks now. Frontier and smaller Emerging Markets are projected to have sky-high population growth, attracting demographic trend-chasers. A potential “drone revolution” has folks scouring for hotshot robo-stocks. Some say Energy’s recent sell-off is a can’t-miss opportunity to pile in and wait for an eventual glorious rebound.
We’ve no doubt the future will be amazing in unfathomable ways, with wondrous new technologies and investment opportunities. That has always been true. But trying to pick the eventual winners now is a fool’s errand. Things might play differently than you imagine! And even if you’re eventually right, it could take ages to play out, causing you to miss opportunities (and better returns) in the meantime.
Take demographics. If you went all-in on Brazil when this bull market began, solely because of gangbusters population growth forecasts, you’d be behind world and Emerging Markets benchmarks—41%, versus 179% and 132%, respectively.[i] Brazil’s population burgeoned! But other factors, like government intervention with state-run firms and the end of the commodities bull market, mattered more. Heck, we can’t think of any economic cycle anywhere that was driven by population growth. Smaller Emerging Markets and Frontier Markets do have fine opportunities, but you must look past demographics. Political and economic drivers matter more, particularly over the foreseeable future.
Always look forward when crafting an investment thesis. But not so far forward that you ignore earning a return along the way. For one, what if you miss? What if you go hogwild for immunotherapy, banking on a cancer cure, but the real magic happens with genetics? What if the biggest winners are firms that figure out how to grow organs for transplant from your own DNA or 3-D print a custom-fit heart valve? Or, consider Technology. What if you go crazy for drones, thinking PizzaBot[ii] will make all pizza deliveries by 2025, but eye-popping growth really happens in the field of microdrones? What if nanobots working medical miracles bring higher profits than poor PizzaBot?
Or, what if you nail the technology, but other areas simply do a lot better? When new technologies emerge, the biggest winners often aren’t the Tech firms that make the hardware or software. Often, the creative users in other sectors who imagine ways to apply the technology win even bigger. Think of all the consumer products that use hard drives, flash memory and even microprocessors now! Yes, the pure tech firms supplying the components do well. But the inventive users who spin those components into tomorrow’s must-have might do even better. Ditto for firms using new technology to improve production processes. 3-D printing is used in applications from small-scale architecture models to intricate medical implants. Architecture or medical device companies don’t get as much attention as 3-D printer makers, but what if they’re better investment opportunities because 3-D printing reduces costs, boosting margins? Same story in Energy. Fracking is huge! But Energy firms haven’t much benefited financially. The real winners are firms enjoying lower operating costs thanks to cheaper, more abundant oil and natural gas.
Finally, what if cyclical factors just benefit other sectors more? The Internet was a marvelous development, and those predicting its bright long-term future in the 1990s were right! But since 1990, Consumer Discretionary and Health Care have outperformed Tech.
Instead of piling into areas you expect to do phenomenally well in the distant future, in our view, you’re better off basing decisions on where we are in the market cycle and your outlook over the next 12 months. For one, what if you have an unexpected need for cash, but you’re still waiting for your picks to payoff and can’t make ends meet? Moreover, stocks generally don’t look more than about 30 months out and look hardest at the next 12 to 18. Focusing on areas likeliest to do best in that window (and owning some things you’re less cracked about, just in case) should get you much closer to the target. Because, we can assure you—you won’t be jetting around on a hover board come January 2016. (But hey, if you are, so much the better, and please take us for a ride in your time-traveling Delorean! Please!)
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[i] FactSet, as of 1/22/2015. MSCI World Index inclusive of dividends; MSCI Emerging Markets Index; MSCI Brazil Index 3/9/2009 – 1/21/2015.