Many investors come to the ASX hoping to find a stock that can be bought once and then ignored for the next 20, 30 or even 40 years. The problem is that such a stock would require a company to remain profitable, competitive, well managed and appropriately valued across multiple decades of economic, technological and social change. In reality, no company can offer that certainty. A stock is not a savings account or a government bond. It is ownership in a business, and businesses are constantly changing.

ASX is concentrated

One reason set-and-forget stocks do not really exist on the ASX is that Australia’s share market is unusually concentrated. A large proportion of the market is made up of banks such as Commonwealth Bank, Westpac, National Australia Bank and ANZ, along with resource companies such as BHP, Rio Tinto and Fortescue. These businesses may be high quality, but they are heavily influenced by factors outside their control. Banks depend on housing markets, credit growth, interest rates and government regulation. Miners depend on commodity prices, global demand and the economic health of countries such as China. An investor may believe they are buying a permanent winner, but in reality they are also buying exposure to economic cycles that can last many years.

Technological Changes

Another reason is that industries themselves change. Investors often assume that today’s dominant companies will remain dominant indefinitely. History suggests otherwise. Every generation has had companies that appeared almost impossible to challenge. Around the world, businesses such as Kodak, Nokia and BlackBerry were once viewed as industry leaders with strong competitive advantages. Yet technological change eventually undermined their positions. The lesson is not that these companies were poorly run. The lesson is that the future often develops in ways investors do not anticipate. Even if a company appears safe today, nobody knows what products, technologies or competitors will emerge over the next 20 years.

Expensive blue-chip stocks

An additional problem is that even a great company can become a disappointing investment if investors pay too much for it. Many people focus exclusively on business quality and forget that the stock market is also about valuation. A company may continue growing profits for years, but if its shares were purchased at an extremely high price relative to those profits, future returns can still be poor. This is one reason investors occasionally become frustrated with stocks that are clearly successful businesses but whose share prices stagnate or decline. The business and the investment are not always the same thing.

Management Change

Management risk is another factor that prevents any stock from becoming truly set and forget. A company may thrive under one leadership team and struggle under another. Chief executives retire, boards change, strategies evolve and corporate cultures shift. An investor buying a stock today is not only investing in current management but also in managers who may not even be working at the company yet. Predicting how future leaders will allocate capital, respond to competition and navigate economic challenges is impossible over very long periods.

Regulation Changes

Government policy creates another layer of uncertainty. Banks can be affected by lending regulations and capital requirements. Healthcare companies can be affected by reimbursement policies and regulatory approvals. Resource companies can be affected by environmental laws, taxes and geopolitical developments. These factors can materially influence profitability even when the underlying business remains strong. Because governments and regulations evolve over time, no investor can confidently assume that today’s operating environment will still exist decades from now.

Capitalism

There is also the issue of capitalism itself. Capitalism rewards innovation and punishes complacency. New companies emerge, old companies decline and entire industries are reshaped. The largest companies in one decade are often very different from the largest companies a few decades later. Investors frequently underestimate how much turnover occurs among market leaders. The fact that a company is a blue chip today does not guarantee it will even be considered a blue chip in 20 years.

 Longer time horizon creates greater uncertainty

Perhaps the most important reason set-and-forget stocks do not exist is that uncertainty compounds with time. A one-year forecast is difficult. A five-year forecast is harder. A thirty-year forecast borders on impossible. To be a genuine set-and-forget stock, a company would need to survive recessions, market crashes, technological disruption, changing consumer preferences, leadership transitions, regulatory changes and competitive threats while continuing to create value for shareholders. Some companies come remarkably close for long periods, but none can guarantee that outcome.

Lauren Hua is a private client adviser at Fairmont Equities.

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