What Next In Investing?

Here are some far-fetched ideas of what may happen in the next twenty years if current trends persist:

With low nominal growth scenario on the horizon, options are limited. Companies will shy away from growth projects and instead return as much cash as possible to investors, mostly via buybacks and investing just enough to prevent damage to their businesses. If companies choose to grow it would increasingly be via low-risk M&A, buying established businesses with some overlap that enables them to take out costs rather than embark on ambitious and uncertain green-field expansion.

Any Mars-bound, reach-for-the-moon projects will be the privilege of Google et al. Unique small ventures will raise money through private equity or crowd-funding; IPOs are mostly a mechanism for insiders to cash out, not deliver fresh funds.

The continued rise of indexing would mean that the same large investors own most companies. Therefore, because of this ownership structure, competing aggressively between similar companies will be detrimental to the large investors who lose in aggregate if industry profits decline. Furthermore, game theory would dictate that moderate competition is far more desirable than winner takes all.

Another result of the dominance of index investing is that more and more money becomes uninformed and ignorant of the underlying business. This should lead to initially higher returns, followed by long-term lower returns for index constituents.

Systemic risk would rise for everyone due to the increasing homogeneity of holdings. There will be parties that will take advantage of this homogeneity, although they will be the “1%” of the general population of investors. Those who are able to do so will be able to reap much higher returns, at the expense of the rest of the investors who are generally index-bound. Hence, expect increasing inequality of returns.

The uniformity of pensioners’ portfolios would be a headache for governments to deal with. Many would be left vulnerable when they come into retirement. It’s not only the discount rates that are of concern, but also the composition.

If central banks continue to affect markets, inadvertently deciding the winners and losers of their policies, there will be a concentrated effort to rank assets from those most affected down to those least affected. ‘Policy portfolios’ would come into fashion.

As I’ve said at the beginning, far-fetched.

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