When Mozart was still a teenager, although already a virtuoso, a young man of his age approached him and asked how to compose a symphony. Mozart replied that he needed to study for many years before even attempting it. The young man, upset by the answer, said: «But you were composing at ten years old.» Mozart, without changing his expression, replied: «Yes, but I didn’t have to ask how.»
Just as with people, we also find genius in companies. Sometimes, it’s the «juniors» who challenge the masters. One of the most controversial discussions we’ve been seeing in the markets in recent years is the apparent struggle between value and growth. The winner by KO is growth. But the boxer in red shorts, with his eyes closed and swollen, sitting in his corner trying to catch his breath and, like in the joke, saying he’s got the opponent where he wants him, still seems unwilling to surrender.
One of the biggest mistakes often made with investments is thinking that things don’t really change completely. And that the traditional companies we have in our portfolio, the national champions, will continue to be so forever. And that in the face of any new development in their sector, they will have the ability to adapt and overcome any new rival, based on the knowledge acquired over years, if not decades. And that they usually have a strong current balance sheet picture, with solid cash positions and growing sales. Warren Buffet gave a talk a long time ago about the advent of the automobile at the beginning of the 20th century. The main investment conclusion was not so much to buy car companies, but to short horses.
We can have this discussion by looking at the disparity in the performance of Tesla and the rest of the automakers or seeing how Telefónica continues to drag itself down in the stock market.
Not too long ago, we had many cases that should serve as examples, if not warnings. We have the example of Nokia. In 2008, when the iPhone 3G hit the market, the Finnish company was the world’s largest mobile phone manufacturer. What we didn’t know then was that Nokia would ultimately be the world’s largest manufacturer of dumb phones, and Apple was about to become the manufacturer of smart phones. We did not clearly know that smartphones would dominate the world. And the problem often lies in semantics. The problem is that we kept talking about phones when what we had in our hands was a computer that also made phone calls and did many other things.
In theory, no one knows more about making cars than the traditional brands, those that have been making cars for over a hundred years, and that history leads us to believe that they will be the same companies sending cars to the streets within a decade, even if they are electric instead of gasoline. The natural continuity to what we know may be the easiest cognitive model, but not the most appropriate.
If we continue with Nokia, a little before the appearance of the iPhone, it had a first crisis from which it recovered. It was when it missed the wave of flip phones released by Motorola. It had a few bad quarters, but it could adapt to the new trends. It was a slight technological change, but Nokia adapted without problems. Something it could not do with Apple. Nokia was a very efficient phone designer, with very little software and limited functionality, and knew little about interfaces. It reacted the way it knew how, tweaking its Symbian system, but failed miserably. Knowledge is not always an asset. When you are in the middle of a transition from one domain to another, knowledge of the past domain can cloud your vision, and you see things through the lenses you used to use.
Another example from the automotive industry. When the first cars were made, they did not have a steering wheel but used a kind of ship’s tiller because the manufacturers were former carriage makers. Although it was possible to transition from horse-drawn carriages to combustion cars, most companies did not and were stuck in the old technology. And here comes another problem companies have to face. When your current and main business works like a cash cow that you keep milking, it is difficult to create another business that may be fantastic in the future but penalizes your current business. We can give another example with Amazon and Barnes & Noble. The latter sold more books in a day than Amazon did in months but did not want to switch to online sales to avoid losing margins in its traditional business. We have the opposite case with Walmart, which did not hesitate to pay a lot of money for Jet.com and has managed to adapt to the competition from Jeff Bezos, although it is still light-years away from Amazon in efficiency in product delivery (Amazon’s autonomous couriers in Madrid are charging 40 cents per package) and speed.
Regarding the markets, we warned last week about the excessive negative positioning of many players in the market, and that this can always cause a counter-movement. Letting ourselves be carried away by the numbers has these problems. The markets have been compensating for any drop in earnings per share by raising valuations. That’s how markets are. In real life, however, there are people so primitive that they can’t think of any other method to make money than working… The gap is widening between what happens to the man on the street and the man on Wall Street. Over the last eight weeks, there has been a rise of 38 million unemployed in the United States, accompanied by a global GDP loss of around 10 trillion dollars, which has been offset by a purchase of 4 trillion dollars in assets, resulting in a rise of 15 trillion dollars in global stock market capitalization.
And what can happen now? For now, we are in the same modus operandi as during the last quarter of last year. Back then, every day there was news that the trade pact was about to be signed in a few hours, and just that kept the markets on an upward trend (that nothing was eventually resolved does not matter). Now, that signature has been replaced by the almost daily arrival of a new vaccine or the successful reopening of the economy. There is an interesting study published by Carnegie Mellon University this week. The study identifies Twitter as the most used source to push for the reopening of the American economy. The study finds that about half of the 200 million tweets discussing COVID-19 since January 19 have been initiated by bots (machines), and of the 50 most influential accounts, 82% are bots. So, as long as we move from phase to phase, this trend can be maintained. That said, the market has reached the targets we had set in the broad trading range, and we see few gains right now in staying long. The markets have recovered between 50 and 61.8 percent of the drop, and it will be hard for them to rise from here. In other instances of drops exceeding 50%, (1929, 1938, or 1974) they stopped at these levels and started a bearish turn. We think more in sectoral terms than indices at the moment. Over the past few days, for example, we have built a bullish position in the banking sector, a sector we had not touched in the last three years. It seems that the banking sector in Europe, which still hit lows last week, is building an attractive floor around 50, and the technical requirements for a bet are met (sector punished and hated by investors). From the fixed income markets, nothing to say. The Central Banks have decided to set the prices of government and corporate bonds, and their yields no longer provide any information about risk. Let them play among themselves!
As a great historian said, many of the problems the world faces today are the result of short-term measures taken in the last century.
Have a good week,