Next Decade’s Winners

Nuclear energy, invisible computers, jetpacks and vacations on Mars… Futurists, government agencies, academics and hucksters have been making predictions for decades. Some predictions are overly optimistic, some are fairly accurate, and some are simply crazy.

Here are a few predictions from decades past about what life would be like in 2020:

1. China will be the world’s largest economy
2. Life expectancy will rise past 100
3. We will have self-driving cars
4. Robots and artificial intelligence will take over all physical work
5. Books will be dead
6. Normal retirement age will be 70
7. Cars will go for months without refueling (because they will all run on hydrogen)
8. Nuclear will replace natural gas
9. Humans will set foot on Mars
10. Contact lenses will replace mobile phones

In Bill Gates 1999 book “Business @ the Speed of Thought”, Gates predicted that personal devices will “connect and sync all your devices in a smart way… and allow them to exchange data…. allowing them to automatically adjust to what you’re doing.” 

This prediction from Bill Gates was pretty insightful 20 years ago, but it’s reasonable to assume that the most successful technology man at that time simply assessed the growing capacity of technology to put together a progression of how technology would ultimately impact our lives twenty years later.

Do we have to be as smart as Bill Gates to make a reasonable prediction? Is there data that we can use today to help us make better investments?

We decided to look at the historical returns of different asset classes over rolling ten-year periods to see if there was any connection between the performance of an asset class in one decade and the performance of that same asset class in the following decade. More specifically, we were looking at those relationships after periods of extreme positive or negative performance.
We recognize the danger in trying to find a pattern in a set of data. As anyone can find a pattern in any set of data if they look hard enough. Patterns, however, have more relevance when there is some logic to support their existence.
While we cannot make this case for every asset class over every decade, it is worth noting that the asset classes that rose to the top in one decade oftentimes under-performed in the next decade. And the asset classes that under-performed in one decade oftentimes earned attractive returns in the next decade.
Looking at the annualized historical returns of three US indices over the past three decades we observe periods of strong performance followed by periods of weak performance.

Source: Capital IQ – Annualized returns by decade

A naïve strategy employing this concept would simply buy all the sectors that under-performed last decade and short all the sectors that outperformed last decade, but that strategy would have times when it fails miserably.  

In the case of the Nikkei 225 in 1999 – had you bought the Nikkei 225 in 1999 (because of the poor performance from 1990 to 1999), you would have been in for another decade of disappointment. 

Source: Capital IQ – Annualized returns by decade

Or had you sold the S&P 500 short in 1989 (due to the high performance between 1980 and 1989) – you would have been sorely disappointed in the outcome. 

Source: Capital IQ – Annualized returns by decade

But there will be times when that approach does work, as in the case of the German DAX or the Alerian MLP index at the end of 2009.

Source: Capital IQ – Annualized returns by decade

While the naïve approach may not be the best idea to implement, the concept is worth considering in the context of a more comprehensive look at that global market. Because this concept is another way of identifying relative value.

As we have addressed in past Insights (The Cyclicality of Growth  Can A Simple Formula Really Outperform The Market?  Profiting From the Failure of Active Managers), future performance is highly predicated on beginning price. And the sectors that performed extremely well last decade have a higher probability of being overvalued today. And the sectors that severely under-performed last decade are more-likely to be undervalued today.
With much of the bad news priced into last decade’s poor-performing sectors, it may be time to reassess where to put our investment chips as we begin 2020.

Please note that historical returns are not necessarily predictive of future returns. All investments expose investors to risk, including the potential loss of all capital invested. This Presentation has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell interests or any other security or instrument or to participate in any trading strategy.  This Presentation is not to be reproduced or distributed to any other persons and is intended solely for the use of the persons to whom it has been delivered. This material is not for distribution to the general public. No representation or warranty (expressed or implied) is made or can be given with respect to the accuracy or completeness of the information in this Presentation. No person has been authorized to make any representations concerning the information described in this Presentation that are inconsistent with the statements contained in this Presentation. For additional information about Telos Asset Management Company (TAMCO), or to obtain further details regarding our Deep Value Strategies, please feel free to contact us directly.