As long-term investors we face the challenge of investing for a future of which we can’t foresee. The tenet of long-term investing therefore isn’t to predict those transformations but to find management teams and organizations that have proven themselves the most capable of adapting to those changes.
Constant churn
Many publications have pointed out the disappointing returns of the S&P 500, and by proxy the SPDR S&P 500 Trust, over the past decade. But few have pointed out the radical changes in the underlying components.
Iconic American companies have been replaced by others. Eastman Kodak was replaced by F5 Networks, Inc. (NASDAQ:FFIV). The New York Times was replaced by Netflix, Inc. (NASDAQ:NFLX).
According to a study conduced by Innosight, the average time a company spent listed on the S&P 500 was 61 years in 1958. By 1980, the average time dropped to 25 years. Today, the average company sits on the index for just 18 years.
Over the last decade, nearly half of the index has been replaced and the rate of change is only expected to accelerate.
Creative destruction
Richard Foster, author of the book Creative Destruction, argued that the lifespan of a company is determined by how effectively management can:
- Run current operations efficiently
- Create new businesses to meet evolving consumer needs and
- Shred business that no longer meet company standards for growth and returns.
The only way companies can survive over the long term is to embrace creative destruction – the constant economic turmoil created by new technologies and business models. But few companies will achieve this goal and most fade with time.
The problem is that the goals listed above are in conflict. Companies often focus on current operations. Emphasis is placed on short-term profitability rather than managing their long-term evolution to keep pace with a changing economic environment.
Examples
Markets outperform companies – they always have with only a few exceptions. As investors, we want to find those exceptions.
Two companies embrace reinvention like no other.
International Business Machines Corp. (NYSE:IBM) has managed to survive a century in the fast moving technology sector by evolving from a tabulating company into an I.T. consulting powerhouse.
During the 1980’s, International Business Machines Corp. (NYSE:IBM) dominated the PC market. The segment grew revenues from $500 million in 1981 to $5.5 billion by 1984. But within a decade, International Business Machines Corp. (NYSE:IBM) had been replaced by more nimble competitors and the company was worth more broken apart than as a whole.
Former CEO Lou Gerstner logged long hours with customers and reinvented International Business Machines Corp. (NYSE:IBM)as a company that could understand its customer’s I.T. needs. By 2000, International Business Machines Corp. (NYSE:IBM) Global Services was the largest I.T. consulting service in the world and accounted for 30% of revenues, Today, consulting accounts for 40% of the company’s $105 billion in sales.
This type of evolution is a feat International Business Machines Corp. (NYSE:IBM) has pulled off several times in its history.
The Procter & Gamble Company (NYSE:PG) is known for its ability to innovate. However, what’s less well known is its ability to cut struggling segments.
In the past decade, the company sold off its Jif, Crisco, and Folgers to The J.M. Smucker Company (NYSE:SJM) and pawned off its $2.7 billion Pringles brand to Kellogg Company (NYSE:K).
The move was essential because it freed up capital and resources to innovate its core personal care and household brands as well as enter new businesses helping the company outpace its rivals.
Foolish bottom line
As long-term investors our goal isn’t to try to predict the future but to find management teams and organizations most capable of navigating that change.
Only companies that can shed old businesses and reinvent themselves will survive. That’s exactly what IBM and The Procter & Gamble Company (NYSE:PG) have done several times in their histories.
The article How to Find a Stock That Will Last a Century originally appeared on Fool.com and is written by Robert Baillieul.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. The Motley Fool owns shares of International Business Machines (NYSE:IBM).. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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