An interesting pub quiz question could be to ask how many times the Nasdaq Composite index has risen from its low point in 1974, which came soon after the index was launched. Has it risen five times, 10 times, 20 times, 50 times? The answer is none of those. It is up an incredible 219 times! Which makes you think about all the blood, sweat and tears that has gone into investment strategy and analysis since 1974. All the meetings of investment committees, analysts’ reports, agonised buying and selling; all the self-congratulation when things go right and the chest beating when they go wrong. Yet has anybody apart from Warren Buffett matched the appreciation achieved by the Nasdaq Composite index. Probably not is the most likely answer.
It is this realisation that created the phenomenon of passive investing, setting up low cost funds known as ETFs (exchange traded funds, which you can buy and sell them just like any other share) which simply track an index.
The investment process is not quite as passive as it sounds because indices are not static. On the contrary they are periodically rebalanced around the best performing shares so they are a bit like momentum funds. The beauty of the process is that there is no discretion involved. As new successful businesses emerge their values rise until they force their way into the indices, displacing businesses that are not performing so well. Think Amazon comes in and some dying department store business drops out and you get the idea of what is happening. Indices are forward looking, based on the businesses of the future and continually discarding the businesses which history is leaving behind. It works so well that in 2017 I launched Quentinvest for ETFs, an online service which advises subscribers when and what ETFs to buy. It is doing very well, especially from the perspective of UK-based subscribers which is most of them.
I describe the UK indices as elephants’ graveyards. For some reason when it comes to technology, which is at the heart of why the US indices are so strong, the UK and Europe have noticeably failed to join the party. Is it something to do with the regulatory mindset, which has led to the creation of the EU and the whole Brussels bureaucracy? I think it may be but whatever the reason the FTSE 100 has become a place where businesses go to die.
The FTSE 100 did have a glory period. Between 1988, when the index was launched and 2000 it rose fourfold. Over a similar period the Nasdaq 100 index (like the Nasdaq Composite but with a heavier weighting of technology shares) rose 24-fold so let’s not get too excited about UK shares.
Since 2000 the Nasdaq 100 has almost trebled from the then peak and risen 15-fold from the 2003 low point. Over the same period the FTSE 100 is down slightly on its 2000 peak and has slightly less than doubled from its 2003 low point. The resulting massive outperformance by US shares of UK shares shows why it makes great sense for UK investors to buy US shares and US-focused ETFs and that is one reason why Quentinvest for ETFs is delivering brilliant results for UK investors. Put another way, as Warren Buffett, has suggested many investors could save a great deal of agonising and obtain good returns just by buying an ETF tracking a key US index. He suggested an ETF tracking the S&P 500, the nearest thing to an index of corporate America. It is not a bad idea. If you look at a chart of the S&P 500 it boomed and busted in the 1920s and 1930s but since then it has climbed impressively. It is currently 3,585. When it reaches 4,530, which it surely will one day, it will be up 1,000 times on the low point in August 1932.
The other implication of the seemingly relentless rise of the main US indices is that selling is not a good idea. If you never sell you are going to win in the end and probably win big. If you try to time your buying and selling you take investment decision making from the rational part of your brain and hand it over to your emotions, especially emotions like greed, fear and crowd psychology. There is a danger that you will buy when everybody is excited (at a temporary high point) and sell when everybody is fearful (at a temporary low point). You end up looking at an index, which has climbed dramatically but somehow you have managed to lose money. This is why I often advocate a strategy of never selling for indices, ETFs and even individual shares.
The vast majority of people who make huge amounts of money in the stock market do it by broadly never selling. These people are the owners and founders of businesses, people like Bill Gates at Microsoft and Jeff Bezos at Amazon. They may dribble out some stock from time to time and realise their vast wealth as a retirement strategy but otherwise they stick by their business through thick and thin because they have an owner’s mentality. Buffett says all investors should feel the same. First they should only buy shares in companies where they want to be a part owner and secondly, once they have bought the shares, they should behave like an owner and be very reluctant to sell.
This is particularly relevant at the moment because of the technology revolution. This revolution is all about technology and is being driven by high and rising spending on research and development. Most of the companies which I look at and recommend across my publications not only spend heavily on r&d but spend much more every year. Globally r&d spending is going through the roof and driving the global technology revolution at an accelerating rate. This in turn is disrupting the way we do things and dividing the stock market into winners and losers on a global scale.
