Survival
If you Google “life expectancy of ancient Romans” you get this:
This is pretty dire compared to the life expectancy of an average American today (78.79 years in 2019); but does it tell the whole story? Not quite.
Evaluating life expectancy in this way is a little like suggesting that the average net worth of the two people below is $51,500,010,0000.
(Warren Buffett on the left has a net worth is $103B and my daughter on the right has about $20k in a 529 plan… Add those together and divide by 2.)
When it comes to the ancient Romans, there is ample evidence to show they actually lived to be quite old (similar to today) if they were able to make it through their first 20-25 years of life.
The lesson here is that surviving is hard, particularly in the early years. That is true for investors as well.
Let’s talk about it:
Survival
To “win” at stock investing you just have to pick some good companies and ride it out, right? Maybe. But there’s an awfully good chance that a company won’t survive — and while the stock market as a whole has always recovered losses, a complete failure of a single company happens relatively often.
I read recently that companies included in the S&P 500 index are dropped out of the index about 4.4% of the time (around 22 stocks, annually); and while getting dropped from the index doesn’t automatically mean the company is failing, it does often indicate that the company is no longer representative of the US stock market in the way that another company may be (think of it a little like Blockbuster video getting replaced by Netflix…. By the way here’s a great article from 1991.)
Dartmouth researchers surveyed all 29,688 companies listed on US stock markets from 1960 to 2009, examined their longevity, and found the following:
1) Companies listed before 1970 had a 92% chance of surviving for 5 years.
2) Companies listed from 2000-2009 had just a 63% chance of surviving for 5 years.
While 2000-2009 was undoubtedly a difficult period for stocks, there is one key difference between the ‘dinosaurs’ (pre 1970 companies) and the ‘newbies’.
That difference: book value assets.
When companies are valued based more on ideas than they are physical assets, it can be harder to survive recessionary environments (people get a little nervous about buying into ideas when food, shelter, transportation, etc. get more expensive). Many companies with a higher rate of failure in 2000-2009 were those which aimed to capitalize on the euphoria of the late 90s tech boom by pitching their ideas, neglecting the health of their balance sheets, and trying to ride an endless wave of optimism about the future. Similarly, the bulk of companies struggling the most in 2022 are those whose value was based on a big bet about the future, with a conscious neglect for today’s profit and balance sheet.
The story of stock returns from 2000-2009 is fairly well known and was therefore given the Indiana Jones-esque title of The Lost Decade for Stocks.
(Indiana Jones and The Lost Decade coming to a theater near you this Christmas!)
The “Lost Decade” refers to the slightly negative annualized rate of return for the S&P 500 over the ten years spanning 2000-2009.
But that’s just the broad stock market, what about the value and growth segments? Here’s the broader picture:
This is purely hypothetical, hindsight is 20/20, and you can’t invest directly in an index (but you can buy index funds).
Okay, with that out of way, the chart above shows the following:
1) The S&P 500 (purple) lost 9.1% over this decade.
2) The S&P 500 Growth (blue) lost considerably more (25.25%) during the back-to-back recessions investors faced.
3) The S&P 500 Value (orange) actually had a positive rate of return (8.54%) over this decade.
Okay, so what does this all mean?
Well, for one, it means I think you should understand the style makeup of the stocks in your portfolio. I won’t encourage you to lean in one direction or the other (there are good reasons to highlight value or growth), but I think it’s important to at least know what you’re doing and why.
It also means you’re not off the hook if you say to me: But Adam, I only have diversified funds so I don’t need to worry about corporate survival. This is because only about 44% of mutual funds and ETFs which existed 20 years ago have survived to today (even fewer are “Winners”— or those which beat their benchmarks… Feel free to email me if you want to know more about that.)
Mutual funds and ETFs fail to survive because fund managers know past performance is a good selling tool (even though we all know past performance is not indicative of future results) and they often close a fund if they have subpar performance because no one will want to buy the fund with a bad track record.
In other words, no matter what you’re doing, you likely need to try to pick funds, or stocks, or funds full of stocks which have a good shot at surviving for you as a long term investor looking to compound returns en route to your objectives.
So, what can you do?
Well, as always, I can’t give specific advice in a blog because I don’t know your personal situation. However, here are a couple principles I believe are universal:
1) Know what kinds of stocks you own. Specifically, breakdown the size of the companies (market cap) and style (value or growth). Again, there are good arguments for owning any size or style, but I’d like you to at least understand those arguments so you can feel confident in what you’re doing.
2) Get familiar with what your funds are trying to do. If you have a fund that is trying to do something significantly different than the broad stock market, you should be aware of that. Or if you’re trying to track the market, you should know that as well.
3) Take care of yourself. There are no investment purchases if you fail to survive.
That’s all for now.
Onward,
Adam Harding, CFP
Past performance is not indicative of future results. For informational and educational purposes only. Not an offer or solicitation of investment, tax, or legal advice.
Resources: (Here’s a good article if you want to get into ancient Roman life expectancies.).
