Track record – What value lessons can be learned from a century of decline in the rail industry?

4th April 2015 by The Value Perspective

By Nick Kirrage

We recently focused on the shifting nature of stockmarket indices in Only fools and bourses – along the way name checking an unlikely combination of a girl band, a sitcom character and a First Century philosopher. Let’s build on that now with the assistance of a rather more financially conventional triumvirate – Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School.

The prolific joint output of these three economics professors ranges from the 2002 investment classic Triumph of the optimists – 101 years of global returns to an annual set of always thought-provoking contributions to the Credit Suisse Global Investment Returns Yearbook, the most recent edition of which we have also referenced in Open season.

The first article, ‘Industries: their rise and fall’, shines a light on how the make-up of stockmarkets can change, offering the remarkable statistic that, of the UK firms that were listed at the turn of the 20th Century, some two-thirds of their value was in industries that today are small or extinct. The equivalent figure for the US is upwards of 80%.

As you can see from the chart below, which compares UK and US sector weightings in 1900 with how they look now, the most striking change relates to the rail industry. A dominant presence 115 years ago, with the sector accounting for almost half the UK stockmarket and more than three-fifths of the US, it is now almost zero in the UK and not much more than that across the Atlantic.


Source: Credit Suisse Yearbook 2015

The flipside of all this, of course, is that industries that were small or non-existent in 1900 now account for almost half of the UK market today and more than 60% of the US. Furthermore, as the Credit Suisse Yearbook points out – making the comparison between telegraphy in 1900 and smartphones today – “even industries that initially seem similar have often altered radically”.

Most investors will be unaware of all the specifics but could the market’s evolution be something they instinctively feel? Is this a reason why so many are always on the lookout for ‘the next big thing’? Aside from the obvious point that investors naturally hunt for growth, it seems possible there is at least a subconscious understanding that, if you stand still, an industry you own could shrink or disappear.

Not, we would swiftly add, that that is by any means set in stone. Food, beverages (including alcohol), utilities and tobacco were all around in 1900 and a number have been among the world’s more successful industries in the years since. Clearly, as an investor, you are not necessarily going to lose out just by standing still – you can still select good sectors and of course good stocks within them.

Interestingly, while the above charts hint at the fear and the greed that effectively drive most investors – while helping those, like us, who seek to take emotion out of the process – they are also a warning against investing too closely in line with a particular stockmarket index. Imagine, after all, having to cope as an ‘index-aware’ manager with a sector that had grown to be more than half your benchmark.

Certainly it would be very hard to decide to own none of that sector and yet, as the experience of the rail industry over the last century or so graphically illustrates, tall trees do not grow to the sky. Now, look at the markets today and try and extrapolate which industries and stocks might be the equivalents of the rail-related investments of 115 years ago. Alternatively, save yourself a headache – and potential heartache – and instead follow the principles of value, a strategy that has continued to reward its long-term adherents, regardless of the massive changes the stockmarket has witnessed over the years.

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