One seemingly obvious way to make good returns is to be on the right side of big, long-term technology trends. History is full of them: the railway boom, mass car ownership and more recently the arrival of the internet. Today’s prime candidate is the green energy transition.
In hindsight, it was always likely that trends such as these would lead to major changes in the economy. I recently saw a pair of photos of the Easter parade in New York. The first was dated 1900 and featured a lone car among the lines of horse-drawn carriages. In the second, from 1913, it was impossible to spot a single horse among the cars.
But even if a trend is clearly destined to have a big overall impact, its progress is normally way too complex to predict with precision. Trying to pick the right companies is like playing the lottery. In the dotcom boom, all sorts of start-ups soared to crazy heights. Most sank without a trace.
How can we ensure we end up holding the winners? For long-term investors, the best way to play these multi-decade trends is simple: track a broad index like the MSCI World, or the S&P 500 in the US, by investing in a fund that replicates its performance and composition as closely as possible. Then let survivor bias do the rest.
Survivor bias, paying attention only to successes, is usually seen as a negative trait: ignoring the lessons of failures. But it can work in favour of investors who don’t want to risk picking winners. In this context, survivor bias describes the way that the composition of an index will gradually change to reflect the firms and industries that are becoming more important. Witness the make-up of the S&P 500: 20-plus years on from the dotcom boom it is heavily weighted towards the tech sector that has come to dominate so much of the economy.
The same now applies to green energy. No one can tell which companies will dominate this field 20 years hence, but indices like the MSCI World, which I track in our children’s pensions, will capture the eventual victors, just as the biggest companies in today’s index—Apple, Microsoft, Amazon, Facebook and Alphabet (Google’s parent)—reveal the outcome of an earlier trend. You don’t need to know which firms will emerge victorious to know some will. An index will keep an eye on the details for you.