A question that comes up quite often in my meetings is how can you beat the market and other asset managers? While Anthony and I don’t intend to reveal all our secrets, I do wish to share one of our tactics with you.

Most managers today believe that US technology companies will dominate the world and the financial markets. The five Titans of the S&P500; Apple, Microsoft, Google, Amazon, and Facebook now account for 20% of all US market capitalization. Managers and their armies of analysts scrutinize these companies from top to bottom. It goes without saying that their work is thorough and of high quality.

So how do you beat these smart and motivated people? Just don't play against them. The “games” here are whether the current expectations towards the companies are justified or not? You can frequently find articles in the press stating "Company X exceeds expectations, the title takes off".

 

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The table above shows the 10 largest companies throughout different decades. In their respective decades, the companies at the top of the ranking were all largely owned by institutional managers and their analysts. Overall, all players own the same businesses, but for their own reasons.

The market always reflects people's expectations. When a company reaches its maximum in terms of weight in an index, it is reasonable to conclude two things. Firstly, the company has performed well in the past and secondly, expectations of them are now at their peak. Note that neither of these two conclusions help us predict the company's success. It only tells us about the past.

 

“In the business world, the rear-view mirror is always clearer than the windshield»

Warren Buffet

Our secret, therefore, is a great dose of humility. We don't believe that we can have a more informed view of Apple or Tesla than other asset managers. Trying to stand out in this way would be tiring and lead to an uncertain outcome. So we spend a good deal of our time exploring lesser known, but very high quality companies.