Concentration in the US Equity Market in the Long Term

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The makeup of the US stock market has evolved over the past two centuries according to the changes in the economy. When the market was first established in the 1800s financial firms were the only ones listed as per an article in the Ruffer Review published last year. Transportation firms especially the railroads dominated in the 1850s. For most of the 20th century energy and materials were the major sectors in the US market.

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Source: Market Concentration – the long view, Ruffer Review 2019

Today technology and communications account for about 40% of the market. This is actually less concentration than in the 19th century when the largest sector accounted for more than half of the market.

Sector Composition of the S&P 500 Index:

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Source: S&P Global

Related ETFs:

  • SPDR Dow Jones Industrial Average ETF Trust (DIA)
  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Railroad Stocks Offer Steady And Long-Term Growth

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The railroad sector is one of the best sectors in the US equity market to invest in for steady and long-term growth. Railroad stocks tend to perform much better than other freight transportation stocks like those in the trucking industry for example. Trucking industry is highly fragmented and go through periods of booms and busts. Railroads on the other hand is dominated by a handful of players and offer excellent growth potential for a variety of reasons including the simple fact that they are cheaper to transport goods over long distances.

Recently I came across an article at Manning & Napier that discussed the investment case for railroads. From the article:

The Value of Precision

In our view, the pricing power characteristics and barriers to entry for railroads are essentially the same as they have always been. Railroads are extremely capital intensive, literally requiring billions of spend each year in maintenance costs. It would be nearly impossible for a new entrant to compete with existing players.

The rails also continue to raise prices at a steady clip for several reasons. First, the industry has consolidated down to 7 rails, and they each operate in different geographies as to reduce competition. There are also few substitutes for a large percentage of the cargo that they carry, and in our estimates, that figure is as high as 70%. Their ownership of their networks, small share of total shipping costs, and demonstrated recent track record of pricing power all suggest that their revenue growth trajectory remains stable.

Beyond the top-line, in recent years the cash flow generation of the rails has materially improved as a result of the adoption of what is known as Precision Scheduled Railroading (PSR). PSR has become an industry standard, and it was first adopted by a US railroad in 2017 by famed CEO Hunter Harrison. The basic principles are to operate a more agile railroad with less traffic congestion, fewer equipment, and fewer employees. This is achieved by running fewer longer and heavier trains, reducing the need for as many locomotives, operators, railyards, and fuel. The result has been an evident reduction in the expense profile of the entire industry, and a material improvement in free cash flow generation.

Source: Investments that chug along, Manning & Napier

The six major railroads listed below will soon to shrink to five when KSU mergers with CP. That leaves the industry even more concentrated. Many years ago BNSF was taken over by Berkshire & Hathaway. So BNSF is no longer publicly traded.

Related Stocks:

  1. Canadian National Railway Co (CNI)
  2. Canadian Pacific Railway Ltd(CP)
  3. CSX Corp (CSX)
  4. Kansas City Southern (KSU)
  5. Union Pacific(UNP)
  6. Norfolk Southern Corp(NSC)

Disclosure: Long CNI, CSX, NSC and UNP

U.S. vs. Rest of the World in Rail Transportation Development: Infographic

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The below infographic shows the development of rail transportation in the US and the rest of the world. From the inception of railroads in the 1800s to modern-day high speed rails, some of the key milestones are noted.

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Source: Unknown (will credit once it is identified)

Related:

Interesting Views on America by a BBC Editor

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It is always interesting to hear their thoughts on the US from foreigners. The views tend to differ based on where they come from. For example, someone from a poor country might consider the US as the best in everything. However someone from another developed country say Canada, Germany, France, UK, etc. might not agree with that assessment completely. Since these countries also are democratic and have political systems and institutions similar to that of the US, it becomes easier for people from those countries to give a better opinion on the comparison. Around Thanksgiving the BBC published a post by Jon Sopel, its North American editor who was returning to the UK after working in the US from 2014. Below are some excerpts from the excellent post from a foreigner’s perspective:

What I’ll miss (not in any order)

Sunshine

National parks and the great outdoors

Skiing in America – so much better organised

Fabulous geographical diversity

Weather reports – so much weather here

Paved cycle trails through stunning countryside

College sport – particularly March Madness basketball competition

Being able to watch all the Premier League football matches you can – even the 3pm kick offs (which you can’t in the UK)

The singing of the national anthem

Burgers and fries

Can do attitudes/innovation

Georgetown

Washington museums and memorials

The device on petrol pump nozzle where it automatically clicks off when tank is full, so you don’t need to keep hand on it (not significant I know)

Epic complexity of Washington politics

Friendliness and kindness

Work ethic

What I won’t miss

Guns – worst bit of my seven years has been going to all the mass shootings

Endless TV ads for prescription drugs promising miracles for first 20 seconds and warning of – in rare cases – catastrophic death in last 20 seconds

Endless political ads during election season that just make you want to live on a desert island

A terrible health system that only works if you have money

Hearing people in front of me at the pharmacy saying they can’t afford the drugs they’ve been prescribed

Seeming lack of interest in what happens in the rest of the world

Restaurants (this is a whole subsection)

– Food that is often too salty or too sweet

– You feel you have to tip 20% cos staff are so badly paid

– Ludicrous hierarchy where you can only talk to waiter/waitress allocated to your table, and not get service from anyone else

– Also why is the person who pours your water never able to take your food order

– Surf and turf – do one, but not the other

– Being asked my opinion endlessly about Charles and Diana/William and Kate/Harry and Meghan – the royal family is an obsession

Source: The America I give thanks for (as I depart), The BBC

A similar topic on reddit a few months received nearly 7,000 replies. You may want to check out: [Serious] Non Americans of Reddit, what is something about America you admire? 

Bull Markets vs. Bear Markets From 1942 To 2020: Chart

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The equity market tend to go higher than lower especially over the long-term. In the short-term measured in months or even a few years the market can be volatile and can decline sometimes when it feels like there is no end in sight for the downward trend. Similarly to the benchmark S&P 500, the Dow Jones Industrial Average also has had bull and bear market over the years and the bull market duration and returns have exceeded that of the bear markets as shown in the chart below. From 1942 to 2020, the average bull market has been over 4 years while the average bear markets has been just over 1 year.

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Source: Principles of Long-Term Investing Resilience, MFS

So the key takeaway is that stocks never go up forever as some investors currently seem to believe. The wise strategy is to have a solid long-term goal and focus on the returns over many years and not worry about day to day fluctuations. Simply being patient and riding out the down days can lead to excellent returns.

Related ETFs:

  • SPDR Dow Jones Industrial Average ETF Trust (DIA)
  • SPDR S&P 500 ETF (SPY)

Disclosure: No positions