Why getting in early doesn’t always pay in investing, according to Fisher Investments UK

One of the most popular topics amongst financial publications Fisher Investments UK’s parent company, Fisher Investments’, research analysts follow: what is the next big investment opportunity? There are seemingly abundant trends featuring potentially promising, high-growth investments, including artificial intelligence, cutting-edge pharmaceuticals and rapidly expanding developing economies. However, in our view, successful investing doesn’t depend on getting a big stake in the next great investment opportunity early.

To find the next big company or trend, you must know what will be in favour years into the future. According to our research, though, stocks focus on the economic and political factors that impact corporate profits over the next 3–30 months or so. Economic and market conditions beyond that timeframe are unknowable, in our view, as too much can change to be able to assign a realistic probability. Even if you do somehow predict the biggest winner, you may miss significant returns whilst waiting for it to pay off.

Consider electric vehicles in the early 2010s. For all the excitement about petrol-free driving, it wasn’t clear at the time which companies would emerge as the winners due to all the unknowns: questions ranged from electric-vehicle battery life to existing infrastructure (e.g. accessible and widely available charging stations). Some industry analysts thought existing automakers – e.g. Japanese company Nissan – had an advantage whilst others favoured newcomers, including Tesla and Fisker Automotive.[i] However, some of those investing theses didn’t play out as projected. Nissan’s annual returns have trailed global equities’ in 7 of the past 10 years – and the company has registered a negative annual return from 2017 to 2020.[ii] Fisker Automotive suspended production of its flagship vehicle in 2012 and filed for bankruptcy in 2013, only to reorganise and issue stock shares to the public anew in late 2020.[iii]

Moreover, whilst Tesla has since emerged as the big electric-vehicle winner, its path wasn’t a smooth and easy ascent. Tesla began as a tiny automaker dependent on government subsidies and was often in financial headlines for missing production targets.[iv] The company, which was founded in 2003, didn’t even record its first full-year profit until 2020.[v] Return-wise, Tesla’s stock had some huge positive years, including 2013’s 335.9% and, most recently, 2020’s 717.4%.[vi] But there were also middling years – including 2011’s 8.0% and 2016’s 6.2% – and 2018’s 13.5% return.[vii] Even if investors identified Tesla as the best-performing electric-vehicle producer long ago, they had a long wait to be proven correct – and in our view, that implies a large opportunity cost (the potential returns missed from being invested in other sectors and industries).

To illustrate how much can change when trying to find the next winner in an exciting investing space, consider alternative-meat producers, which have received attention amongst financial publications Fisher Investments UK’s parent company, Fisher Investments’ research analysts cover due to the nascent industry’s purported growth promise. It is possible one of today’s pioneering non-meat producers expands into a foodstuff giant in the distant future – and its stock delivers huge returns along the way. However, it is also possible the most prominent non-meat producers right now don’t retain their lead and their shares struggle, due to myriad reasons. Perhaps today’s leaders fail to innovate and adapt to the future food environment. Or maybe competitors are better positioned to benefit from the non-meat trend and win dominant market share. It is also possible consumer preferences don’t materially change, rendering alternative meat a niche product that fails to live up to today’s lofty expectations. We don’t think investors can reliably forecast these types of long-term developments, which would be necessary to determine which companies would benefit most.

In our view, many investment opportunities with alleged high future returns can be described as widely known information, as they are often popular amongst prominent market analysts, experts and regular investors because of their perceived potential. Popularity drives attention and discussion about the opportunity, which motivates investors to act through the buying and selling of shares. Since markets are efficient discounters of widely known information, we think a broadly discussed company’s share price likely reflects those views, expectations and up-to-date data. Unless you have unique insight into the company few others do, you may be investing on information that other investors have already acted upon – quite possibly more sentiment-driven hype than unaccounted fundamentals that have yet to be discovered, in our experience.

Also, the mindset of getting in early implies successful investing depends on huge wins – not true, in Fisher Investments UK’s experience. Now, we acknowledge it is possible for investors to hit it big on a single opportunity. But we think it is very uncommon and an approach that can be counterproductive, as a thesis to own a stock can always be wrong. As tantalising and promising as an opportunity may appear, we don’t think anything is assured in investing.

Instead of trying to find a proverbial needle in a haystack, Fisher Investments UK thinks many investors can find success by taking a diversified long-term approach. Since 1970, global stocks’ average annualised return is 10.2%.[viii] (The annualised return is the compound annual growth rate that would generate the cumulative long-term return over the whole period.) That figure reflects the returns of top performers, big laggards and the companies in between. We think by owning a number of stocks across different equity sectors, investors better position themselves to attain market-like returns, which provides the long-term growth many investors require to meet their specific investment goals. This investing approach means your portfolio won’t soar like the latest top performer, but it also likely won’t fall significantly further than the market due to the performance of a single company. In our view, this is a more sustainable way for investors to reach their personal investing objectives.

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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] “Nissan’s CEO Makes the Case for EVs at 2009 Tokyo Motor Show,” Larry Webster, Popular Mechanics, 22/10/2009.

[ii] Source: FactSet, as of 14/12/2021. Nissan Motor Company price return, in pounds, 2011–2020.

[iii] “Judge Raises Concerns About Fisker’s Race Through Bankruptcy,” Tom Hals, Reuters, 10/12/2013.

[iv] “The History of Tesla and Elon Musk: A Radical Vision for the Future of Autos,” Andrew Greiner, Ivory Sherman, Tiffany Baker, Allie Schmitz and Jen Tse, CNN Business, 22/03/2019.

[v] “Tesla Posts 1^st Annual Profit but Misses Analysts’ Estimates,” Tom Krisher, Associated Press, 27/01/2021.

[vi] Ibid. Tesla, Inc. price return, in pounds, 2013 and 2020.

[vii] Ibid. Tesla, Inc. price return, in pounds, 2011, 2016 and 2018.

[viii] Source: FactSet, as of 11/03/2021. Statement based on MSCI World Index annualised return with net dividends in pounds, 31/12/1970–31/12/2020.