Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 295

The S-curve beats the macro every time

Talk to most investment professionals about their investing style, and they will speak about macroeconomics, interest rates and sector valuations as their primary drivers of decision making. But will this really create investment performance and returns? We believe the macro picture is not the secret to success.

Rather, it is the ability to benefit from structural changes that underpin the earnings growth of companies. It is these companies that will deliver the strongest returns over the long term, regardless of the economic backdrop or point in the cycle.

Market evolution and the few companies that do really well

The key is to recognise what the stock market really is. It is a market of companies, and it is continually changing and evolving. For instance, oil and gas used to be the biggest sectors in the S&P 500 index but today it is technology. General Electric Company (GE) was once the biggest company in the world, but it is now at risk of falling out of the S&P 500, while Amazon – which did not exist 25 years ago – has taken its place, with a market cap of over $800 billion.

It is only a handful of companies that truly create and deliver wealth for investors over the long term. A study in the Journal of Financial Economics by Hendrick Bessembinder (Do Stocks Outperform Treasury Bills, updated 2018) looked at every company that has listed in the US over the past 90 years, and what happened if an investor bought and held every stock.

He found that most companies out of 14,000 in total destroyed value versus Treasury bills, with the vast majority going to zero. A further 8,000 companies made enough to offset what the other 14,000 had lost. And 1,100 companies or only 5% of the total delivered all the return in the US market (above Treasury bills). Of these 1,100, there were actually 50 companies that made up 40% of the entire wealth created in the US stockmarket over that 90-year period.

The trick for investors, therefore, is to identify these 50 companies early on, and buy and hold them.

Sounds simple? Of course, it isn’t.

The S-curve helps identify the wealth creators

This is where the idea of the S-curve comes in. In business terms, the S-curve tracks how a company or industry grows over its lifecycle. There comes a point in the lifecycle when growth inflects, driven by a structural change. It is the tailwind created by the structural change that allows a company to deliver and create wealth.

We argue that the S-curve always beats the macro when it comes to investing.

Companies like Facebook, Amazon and Apple have ridden the wave of demand for technology products and services that did not exist 15 or 20 years ago, but which are now considered indispensable in our daily lives. As investors, we seek to identify the next round of structural changes, and then invest in the companies that will benefit from them, at the start of the S-curve and not at the end.

Apple is a good example here. From 2008 to 2017, while the growth in the overall mobile handset market was relatively flat, smartphone penetration went from less than 10% to roughly 70% over the same period. In 2008, there were 10 mobile phone stocks to choose from but only two really worked out – Apple and Samsung. Once household names like Blackberry, Motorola, Eriksson and Nokia failed to seize the structural growth opportunity in smartphones.

Source: Bloomberg. Click to enlarge.

The smartphone market has now stopped growing and Apple is relying on price hikes and its services revenue for growth. The smartphone industry is now at the end of its S-curve.

Video Streaming and Netflix, on the other hand, is still growing. Yes, Netflix’s earnings multiples are high, and it is not yet making material profits, but what’s important is how much earnings it makes 10 years from now, not what it makes in 2019 or 2020. And on this basis, Netflix is poised for immense growth. It is currently in just 10% of broadband homes around the world, and its monthly pricing is low relative to the value of content it offers, so its potential for earnings growth is huge. Video Streaming is still toward the beginning of its S-curve.

Successful company characteristics

Once we identify industries at the beginning of their S-curve, we then need to find the companies that can fully benefit from the structural change. To do this, we consider five company characteristics that we believe are essential for success:

  • Potential for growth: exhibit faster earnings, EBITDA or revenue growth versus peers and growing Total Addressable Market (TAM).
  • Economic leverage: exhibit pricing power or economic leverage to improve margins.
  • Sustainability: exhibit ability to sustain growth due to scale, position, intellectual property or locational advantages.
  • Control: exhibit strong management ownership and incentives.
  • Customer perception: Exhibit strong customer reviews and rapid adoption.

Companies that display all these characteristics are best placed to capitalise on their structural tailwind. Examples we would highlight today would be Amazon in eCommerce, Danaher in Innovative Health and ServiceNow in Digital Enterprise.

 

Nick Griffin is a Founding Partner and Chief Investment Officer of Munro Partners. This article is for information purposes only and does not consider the circumstances of any investor.

 

  •   28 February 2019
  • 3
  •      
  •   
banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The investing rule that explains the next market crash

What if investment success depends less on picking the right assets and more on understanding the decisions of other investors? A principle borrowed from game theory offers a different perspective on markets.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.