Reporting season is a circus. For most businesses, more than half of their net present value will come from cashflows more than 10 years into the future. Why do we focus so much on one six month period?
Behavioural psychologist Daniel Kahneman has a good answer: what you see is all there is. The past six months’ results are sitting in front of us. The next 10 years is largely unknown. So we overemphasize that which we have.
Still, I will say something about this latest circus season. The disappointments have been unusually large. Not large disappointments. But large companies doing the disappointing.
Think about the stocks that have upset their shareholders: Telstra, IAG, QBE, Commonwealth Bank and Brambles were among the worst performers over the past month. They are large, staid, supposedly predictable companies that form the core of most investors’ blue chip portfolios.
The world goes more global
This poor performance has me thinking about the way the world is changing. While we have always had disruption, it used to be Aussie disrupting Aussie. The automobile replaced the horse, but most countries ended up with their own local champion. The telephone replaced the telegraph, but every country ended up with its own Telstra. Television disrupted the radio business, but each country ended up with a small number of dominant television businesses.
That had important implications for an investor. From groceries to banks to insurance, a diversified but local investor ended up with a portfolio that contained both winners and losers.
Disruption goes global
These days disruption is global. The challenges are coming not from other ASX-listed companies but global players like Google, Facebook, Netflix and Amazon. Investing in the largest Australian companies, you own quite a few of the losers and none of the winners.
None of this means you should run out and buy Netflix. “You pay an expensive price for a cheery consensus”, as Warren Buffett puts it, and we have made a lot of money investing where the narrative looks horrible.
The point is simply that the large end of the ASX isn’t giving you the broad spread of businesses that you need for a well-diversified portfolio. There are plenty of options for smaller investors further down the size spectrum. Cochlear, Resmed and Xero are options if you want to own some of the disrupters.
But anyone investing in index funds, closet index funds or a typical Aussie super fund is getting an unhealthy weighting towards old school. That is the biggest lesson from the 2017 reporting season.