Stock Market: The Coming Excitement, And How To Invest In It

The coronavirus-induced shutdowns have speeded up evolutionary economic, business, governmental, institutional and social trends. Call it progress or call it change, the process now is fast-moving, and that makes for the excitement – especially for businesses and investors.

So, how to ride the wave? There are two important steps to take:

First, read the right stuff and ignore the rest

Searching for someone who can foresee developments and investment results accurately is a losing proposition. Instead, focus on those who can provide broad brush views of the trend “flows” – that is, descriptions of the journey, not guesses at the end results.

For understanding the future trends executives are focusing on, Fortune [Magazine] is excellent. This June 26 article is a good example (underlining is mine):

Coming out of a crisis, the boldest companies win

“… economic calamities—even tragic, once-a-century global pandemics—require business leaders to find opportunity in the chaos. It’s there to be found. Leaders who can seize it will mitigate the pain for employees, consumers, vendors, communities, and investors. The big lesson from past downturns is that the competitive order within industries will change far more now than it ever will in prosperous times. The big winners will be the bold companies that break from the mainstream, acting courageously and fast.

“As economies reopen, the great challenge for business leaders in all industries is to look beyond their immediate operational issues, as critical as they are, and also think strategically about longer-term decisions they can make in this moment—positioning themselves to flourish in the good times ahead.

“The results can be dramatic. In the technology bust of 2000 to 2002, 47% of the tech companies that went into the downturn as leaders emerged as laggards, while 13% of those that went in as laggards came out as leaders, as measured by McKinsey. That’s a radical reordering of a giant industry, and it all happened in just two years.

Today’s “bust” is especially dramatic (and filled with opportunity) because it covers so many industries and institutions. Therefore, investors should not anticipate a return to “normal,” with conditions and companies resuming their past positions.

Those powerful growth leaders pre-Covid-19? They can fall, just as their predecessors did – from being too big to adapt quickly and being overly committed to yesterday’s solutions.

So, what about those safer “value” stocks? Cheap prices in today’s market are more likely warning signs of, “Watch out! Survival at risk!”

For understanding how rapid shake-up affects institutions and individuals, I find Alvin Toffler’s 1970 book, Future Shock, to be as valuable today as in 1973 when I was headed to New York City for my first job out of business school.

How can a 50-year old book about the future still be relevant? Because Toffler provided an explanation of the future shock process, not just a list of guesses about what the future would be like in, say, 2000 or 2020.

These first passages from Toffler’s foreword explain his objective and approach (underlining is mine):

This is a book about what happens to people when they are overwhelmed by change. It is about the ways in which we adapt – or fail to adapt – to the future.

“Much has been written about the future. Yet, for the most part, books about the world to come sound a harsh metallic note. These pages, by contrast, concern themselves with the ‘soft’ or human side of tomorrow. Moreover, they concern themselves with the steps by which we are likely to reach tomorrow. They deal with common, everyday matters – the products we buy and discard, the places we leave behind, the corporations we inhabit, the people who pass at an ever faster clip through our lives. The future of friendship and family life is probed. Strange new subcultures and lifestyles are investigated, along with an array of other subjects from politics and playgrounds to skydiving and sex.

“What joins all of these – in the book as in life – is the roaring current of change, a current so powerful today that it overturns institutions, shifts our values and shrivels our roots. Change is the process by which the future invades our lives, and it is important to look at it closely, not merely from the grand perspectives of history, but also from vantage points of the living, breathing individuals who experience it.”

Further on, he writes…

“The purpose of this book, therefore, is to help us come to terms with the future – to help us cope more effectively with both personal and social change by deepening our understanding of how people respond to it. Toward this end, it puts forward to a broad new theory of adaptation.

It also calls attention to an important, though often overlooked, distinction. Almost invariably, research into the effects of change concentrate on the destinations toward which change carries us, rather than the speed of the journey. In this book, I try to show that the rate of change has implications quite apart from, and sometimes more important than, the directions of change. No attempt to understand adaptivity can succeed until this fact is grasped. Any attempt to define the ‘content’ of change must include the consequences of pace itself as part of that content.”

Second, prepare for a major shift in stock market investing

The changes coming will redistribute leadership, power and wealth among businesses and institutions. For stock investing, that means the “tried and true” passive, index-based approach is going to cycle out of its overlong stay. Lower-priced, stagnant funds are no match to what an active manager can earn when the market fractures, as is happening already. And that argument, “active managers cannot beat the market,” is hogwash. My career was one of successfully selecting superior investment management firms that successfully accomplished that goal.

The active vs. passive debate has existed since index funds were first created, and the data supporting each approach has vacillated through market cycles. Importantly, because this passive phase has been so long and allocations to index funds (including ETFs) have become so large, the potential gains from a shift to active management are enormous. Why? Because of what that Fortune article said – so many former leaders will lag the new trend and the favored few (often smaller firms) will succeed at becoming the new leaders.

And then comes step 2 – The active managers’ returns become compelling, driving investor flows out of stodgy-looking passive funds (and the stocks they hold), and into those exciting active funds (and their fewer, selected stocks, thereby driving them higher).

The bottom line – Change is upon us and active management looks best

In short, the coronavirus shock and shutdown has put the underlying evolutionary trends into high gear. Out of this activity and turmoil will emerge adaptations and innovations that can weaken the entrenched establishments and strengthen the agile innovators.

In past periods of such evolutionary change, skilled active managers have easily produced outsized returns. Therefore, now looks to be the time to focus on investing in selected, actively managed funds – or in selected individual stocks, if you are so inclined.