“The Winner Takes it All”

At the beginning of the 80’s, the musical group ABBA it was recognized in the whole world. After winning the Eurovision contest in 1974 with their song “Waterloo” conquered the whole world with other great hits such as “Mamma Mia” (1975) or “Dancing Queen” (1976). On July 21, 1980, after rumors of the possible separation of the band, ABBA released one of their biggest hits: “The winner takes it all” (“The winner is everything”).

These four words have recently been used among large international investors to describe the concentration of benefits or returns in a few companies. The aphorism may not be more accurate because the concentration of investments is reaching historic levels as demonstrated by the who:

1.- The top five companies by market capitalisation in the markets of united States (Apple, Microsoft, Amazon, Facebook and Alphabet) pose as a weight more than 20% of the S&P500 index. In the year 80, the top five companies did not exceed the 15%.

2.- The own Apple, for example, capitalizes on more than 2,000 major companies of small-and medium-capitalization that are publicly traded in the united States.

3.- Tesla worth more than 35 companies of our dear Ibex35.

It is curious to realize that, to reach these milestones, these companies have not needed took many years, since only two of the companies previously mentioned (Apple and Microsoft) were founded before the famous song of ABBA that gives name to this article to see the light.

In the short-termthe market behaves in irrational way, lifted up to a level unsustainable valuations of the companies most popular and leaving it forgotten the most unpopular neglected in the majority of cases, the fundamentals of the companies.

Therefore, to succeed in the short term “only,” you need to measure the “temperature of the market” and stick to the value of more hot. If not, tell that to the shareholders of Tesla.

In the long-term, it is shown that the stock price is positively correlated very clearly with the growth of corporate profits.

There are several studies that are able to demonstrate that up to 75% of the variation of the price of a stock is due to variations in the level of benefits of a company when we consider horizons of 10 years or more.

Below this threshold of time, the profitability of the market has little or nothing to do with the benefits as we could see in 2018: the growth was +30% (with some positive expectations also of business results for 2019), and, however, the american market finished the year with falls of up to 10%.

So, what are reasonable valuations achieved by these companies? Without entering into a discussion on the effects of the passive management in the stock pricewhich , of course, as an actor increasingly important to the financial markets, contribute their grain of sand on the spirals bullish and bearish, the truth is that behind these assessments lies a common denominator: the growth (or lack of).

In a world that has that to print huge amounts of money to support a level of debt pressing, and where the interest rates are brought below 0% to generate just a few tenths of economic growth, it is normal for this well-so poor, the growth, pay higher prices than its historical average.

And that is, if they have something in common with the majority of the companies of larger market capitalization, it is not only their economic sector (the technological), but his brilliant ability to grow profits steadily in the time. Not even a global pandemic that has paralyzed the economies and international trade has served to derail this historical path of growth of benefits. It is more, as we have seen, in this scenario, it becomes even more necessary to have their services.

The reversion to the mean is usually the argument that many investors resort to when they explain why they kept away from this kind of companies. That is to say, they prefer to focus their investments in companies with valuations much lower waiting to have a rotation of flows from the companies more “lucky” to the most disadvantaged and, in some cases, obviate the obvious: the share price of a company (or a set of them) is the lowest of the last 50 years does not say anything per se.

For example, the companies of procedures of carriages that are listed very cheap when it began to arise the railroad in the united States and, as we can imagine, never came back to the prices seen just a few years ago. With this I do not claim that there is no reversion to the mean (there is) but, by itself, seems an argument is vague since “the market can keep their irrationality longer than you can maintain your creditworthiness” (John Maynard Keynes).

The valuation of a company is not more than the discount to present time of the future profits of the company. If the denominator (discount) we have interest rates at 0% and in the numerator the benefits, it is not surprising that those companies with numerators highest warrant a valuation higher. It’s simple math.

Therefore, in order to grow our net worth would need to find companies with increasing returns and wait for the time to go putting into quotation the value generated by these companies. So how easy? If, if we have the help of best financial advisors that give us the opportunity to invest in investment funds managed by professionals who have been dedicating their time and effort to to find this kind of companies since the years of ABBA.

*** Ismael Garcia Bridge is an investment manager and selector of funds of MAPFRE Wealth Management