Thread by @SouthernValue95

(1) New year has led to lots of reflecting around the drivers of performance: growth, value, momentum, capitalization, sector focus, lots of ways to slice data in hindsight. But this isn’t how I think of the investing opportunity set. If you found opportunities to buy great…

(2) …businesses at attractive prices, who then executed on their plans the ensuing 5-6 years, you likely did very well. I don’t believe this is fad or cyclical. Rather, great businesses accruing the lion’s share of new economic value created should be expected to persist.

(3) In the last 7 years (’12 - ‘19), 5 companies (Apple, Microsoft, Amazon, Google, Facebook) have added $3.7 trillion of new market cap. 10 companies (adding BRK, V, MA, CRM, ADBE) have collectively added $4.8 trillion dollars of new market cap.

(4) This wasn’t a fluke or a mistake. These 10 companies were each shrugged off at different times as “obvious and fully valued,” “too expensive,” “too big to grow,” or “past their prime.” Investors who looked past the narrative and were able to own these companies have…

(5) …been rightfully rewarded by the continued success of the underlying businesses. All 10 companies have observable and understandable business models, most people interact with their products every day, all have formidable competitive advantages, generate cash, have been…

(6) …reinvesting thoughtfully and become stronger and more valuable every day. There are 3,300 companies with market caps >$25mm in the Wilshire5000. 2,700 of them have market caps under $9bn, and those are collectively worth about $4.6 trillion.

(7) The 10 companies listed above added more value in the last 7 years than these 2,700 companies collectively are worth today. Just 5 of them have created new value equivalent to 80% of the market cap of the 2,700 companies.

(8) Explaining the above phenomenon simply as “growth has outperformed value” is missing the point. The greatest arbitrage in equities is not in special situations, beaten down cyclicals, or in the fastest current period growth rates. Those opportunities exist, but ultimately…

(9) …more value is in finding and owning great companies that can create enormous new value over very long periods of time. These companies come in different sizes, growth rates, capital intensity, and valuations, but they can be found in readily understandable businesses…

(10) …run by capable managers, and if held over long periods of time will create substantial value. They can be bought and held with less risk than mining among small caps, spinoffs, structurally challenged sectors or by trying to predict “the next big thing.”

(11) Again, there is money in off-the-path situations, but that isn’t where most of the opportunity lie, especially operating under Buffett’s rules #1 & #2 (don’t lose money). The greater opportunity is to buy attractively priced, carefully selected businesses, and to hold them.

(12) If investors can’t or don’t want to find these great businesses, they can index. But the opportunity in this “strategy” is so large, I don't think it's over just because its worked well. I doubt the next $TN made in equities needs to come from beaten down, cyclical stocks.

(13) The S&P contains more than its share of great companies, which is why it’s so hard to beat. The 10 great companies above are just 2% of names, but 22.5% of S&P weight. With robust PE/VC markets, businesses coming public later and larger, one could argue small caps…

(14) …are not as attractive as they once were. The S&P should continue to be a good place for many people to put their money. For investors who have lagged the S&P’s return for sustained periods of time, and are blaming “growth vs. value” for that outcome, I challenge that…

(15) MSFT, AAPL, FB have resembled conventional value stocks at times, presenting attractive entry relative to long-term opportunity. Expensive-looking stocks V, ADBE, AMZN have executed well and “grown into” lofty valuations and may well do so again. The S&P is betting on it.