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The future is often a lousy investment: Editor’s note

Lewis Jackson  |  08 Jul 2022Text size  Decrease  Increase  |  
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Railways revolutionised society. Trains outpace horses and can carry more than a cart. Understandably, people in the 1840s were rather excited about rail. Thousands of investors gave hundreds of companies millions of pounds to lay rail all over Great Britain. In 1845 alone, over 1,200 railway projects were registered.

They were right, rail was revolutionary. The deluge of money ultimately created thousands of kilometres of track and ushered in cheap freight and travel. Unfortunately, it was terrible for investors, many of them new, who lost millions when the rail bubble popped in 1847.

Today, investors are again awash with opportunities to bet on revolution.

One soon-to-be launched fund promotes the “solar energy revolution.” There are also revolutions in genomics, robotics, AI, cybersecurity, cloud computing and energy storage, according to fund managers. Nuclear energy is undergoing a renaissance, according to one fund’s breathy prose. Never mind the nationalisation

Behind these pitches is the hope revolutionary change is profitable. If the world desperately needs clean energy or clever robots, surely the providers will make lots of money, so the argument goes. But as with rail, revolutions in energy or automation may be of ambiguous benefit to investors.

Popularity is partly to blame. Revolutionaries are loud and enthusiastic. Revolutions attract lots of attention and money. “The world is short clean energy” is a profitable lightbulb moment for one person. Less so if hundreds share it. If it's in the paper, you're too late.

Take lithium. Investors are loud and enthusiastic. Lithium miners attract a lot of attention and money. Here’s lithium on the front page of the Wall Street Journal.

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But then Goldman Sachs wrote in May: “the battery metals bull market has peaked”.

Few companies will be the Lenin, Mao or Fidel of the next technology revolution. The shale industry revolutionised oil. It also vaporised hundreds of billions of investor dollars. The roughly 2,000 US car companies of the early 19th century were winnowed down to three by 2009. Two were bankrupt.

"There's a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future," says Warren Buffett, who’s picked a few stocks in his time.

The survivors often turn out to be humdrum businesses. Electric cars are a revolution for drivers and the environment but car companies usually make mundane investments. Research is expensive. Factories big enough to churn out thousands of cars cost billions and require thousands of workers. All that, and customers kick the tyres and buy another brand.

Ford, which dodged the bankruptcies of its competitors General Motors and Chrysler, managed an annualised return of -22.1% in the decade leading up to 2009.

Most car companies are lucky if margins break out of the single digits. Return on capital, which captures the profits investors receive from the billions poured into factories and equipment, hover just over zero.

Compare that to Apple, which had return on assets of 28% last financial year and margins of 26%. Facebook and Google operate in similarly rarefied air. Big tobacco grandee Philip Morris also has tech-like margins. Even BHP manages double digits.

Now, Tesla, with its software and expansion into energy storage, may herald a new era for car companies. Early signs are encouraging. Or it may end up just another carmaker.

Solar energy is another lukewarm revolution for investors. The market is dominated by Chinese companies and the panel and equipment manufacturers manage even thinner margins than automakers. When they do manage a profit, returns on assets are uninspiring.

There’s no law that says investors profit from societal revolutions. Britain’s railway bubble gifted the country a modern rail network and bankrupted thousands of small investors in the process. Today's city dwellers have enjoyed a decade of cheap cabs and free food delivery because investors looking for the next Facebook funded cash furnaces like Uber or Deliveroo (that's changing).

Sometimes it’s better to just buy the product.

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is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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