The Corporate Mortality Rate!
In the 1920s, the average American company had a shelf life of about 50 years. Now, companies are living fast and dying young at only 15 years of age. That’s a 70% drop in average lifespan, so does it bring long-term investing in question?
No, investors playing the long game will still enjoy tax benefits, lower trading costs, and the magic of compound returns! However, with companies getting disrupted without warning and the reaper hovering so low, market players need to be more conservative. Globalization and the information age mean more entrepreneurs out there to put us out of business. It pays to know your way around the corporate life cycle!
When a great business idea finds harmony with excellent execution, a promising new company is born into the infancy stage of the lifecycle. Venture capitalists, angels, and insiders risk the most in these early days, with 30% of new American businesses falling by the wayside within two years. However, paybacks can be phenomenal, routinely upward of 25% annually.
If the start-up isn’t squashed early, it will grow into a disruptive teenager, terrorizing established industry stalwarts with new technology and youthful energy. Consider Tesla’s electric car revolution in the auto sector or Uber and Lyft’s ride-sharing apps putting black cabs in a quandary. These are “growth” stocks. The future is uncertain, but a big appreciation in stock price is elusive.
All being well, Tesla, Uber, and Lyft will grow to a point they can grow no more. That’s success. Their brands, economies of scale, and network effects should protect stable profit margins and turn them into good picks for a defensive investor. Until that is, another teenager snipes these sitting ducks, too big to adapt to the everchanging world.
It will happen. It must happen. When? That’s what the market pays you to figure out!