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

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Latest Updates

Retirement

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Financial planning

How much does it really cost to raise a child?

With fertility rates at a record low, many say young people aren’t having kids because they’re too expensive. Turns out, it’s not that simple and there are likely other factors at play.

Exchange traded products

Passive ETF investors may be in for a rude shock

Passive ETFs have become wildly popular just as markets, especially the US, reach extreme valuations. For long-term investors, these ETFs make sense, though if you're investing in them to chase performance, look out below.

Shares

Bank reporting season scorecard November 2025

The Big Four banks shrugged off doomsayers with their recent results, posting low loan losses, solid margins, and rising dividends. It underscores their resilience, but lofty valuations mean it’s time to be selective. 

Investment strategies

The real winners from the AI rush

AI is booming, but like the 19th-century gold rush, the real profits may go to those supplying the tools and energy, not the companies at the centre of the rush.

Economy

Why economic forecasts are rarely right (but we still need them)

Economic experts, including the RBA, get plenty of forecasts wrong, but that doesn't make such forecasts worthless. The key isn't to predict perfectly – it's to understand the range of possibilities and plan accordingly.

Strategy

13 reflections on wealth and philanthropy

Wealth keeps growing, yet few ask “how much is enough?” or what their kids truly need. After 23 years in philanthropy, I’ve seen how unexamined wealth can limit impact, and why Australia needs a stronger giving culture.

Sponsors

Alliances

© 2025 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.