Today’s Stock Market Illusions

Deluard then made the assumption that the 351 companies in the Russell 3000 would produce similar success over the following 17 years, like the unstoppable businesses above (26% annual revenue growth) and fall to a price-to-sales ratio of 6.4 as well.

Using a discount rate of 10% to calculate the present value of what these 351 companies would be worth in 2038 under his assumptions, Deluard found that 59 of them already have higher market caps. In other words, “the market currently expects that almost 60 companies will be more successful [over the next 17 years] than Microsoft, Apple, Google and Amazon [have been over the last 17].”

As Deluard notes, this is more like the Nifty Fifty than any other point that we’ve seen in stock market investing. To help investors see how real this illusion is, we pulled the excerpt below from Knowlton’s book when he talked about Simplicity Patterns in 1970:

Simplicity Pattern has made itself the dominant company in a $2-billion industry—the home sewing industry.

Of the more than 300 million garments made at home in 1970, Simplicity’s patterns were used to make more than half. Simplicity markets patterns for all ages and all degrees of sewing talent. It publishes several magazines that aid in the promotion of its patterns—magazines relating to the latest fashions, instructional texts, teaching guides, and a monthly news bulletin. Twice yearly it publishes a catalogue. Because this company saw consumer need and created a unique market, it now earns more than 20 percent on shareholders’ equity and 12.7% percent on sales after taxes.

It’s so funny to read this. Simplicity’s booming sewing business was producing 20% return-on-equity. Some would say this was a moat and that a high level of return could be sustained far into the future as sewing didn’t look like it was changing for a long time. For a millennial, this is hysterical to even fathom. Lubrizol, Xerox, and other names like it were companies that people dreamed about. Now, we chuckle at the thought of what happened then.

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Disclosure: The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and ...

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