EVER felt like the world is changing faster and faster? It’s because technology is using technology to advance itself.
This is compounding in action – and as with any exponential function, it sees technological advancements being made at an increasing rate of change over time (see Moore’s law). What’s next for five of 2024’s most dramatic tech stock stories
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The technological singularity is the exact moment that this ‘rate of change’ becomes vertical or, phrased differently, technological change becomes immediate, concurrent and infinite. This is a hypothetical scenario and unlikely to ever happen, but it is an interesting thought experiment to understand how the world is changing faster and faster.
Another way of looking at this change is by observing the average longevity of some of the largest companies in the world that lie within the S&P 500 Index.
Here is a wonderful quote from an article by McKinsey: “A recent study by McKinsey found that the average life-span of companies listed in Standard & Poor’s 500 was 61 years in 1958. Today, it is less than 18 years. McKinsey believes that, in 2027, 75% of the companies currently quoted on the S&P 500 will have disappeared.” Yet the market system in the US, where lobbying is prevalent, tends to reward larger companies — which have larger lobbying budgets — with favourable laws and policies, while the rise of passive investing tends to reward those companies that have larger market caps with larger passive buying of their shares via indices.
These two realities contradict the trend shown in the graph — large company lifespans are collapsing.
So what gives?
The only thing I can see that could be causing this is that the rate of technological change is increasing, and thus the potential for major disruptions to old, large and typically slow-to-change blue chip companies is increasing.
Perspective
The four oldest companies in the S&P 500 are AT&T, ExxonMobil, Coca-Cola and Procter & Gamble (General Electric fell out of the index since this article was written!). What is quite notable about these four stocks is that they are far from the largest in the index (ExxonMobil is the largest, and only has a 0.95% weighting in the index).
Logically, there are frictional costs to technological change that mean the rate of change can never get vertical.
There are also business realities in company lifespans that prevent the expected lifespan of a successful company going too low, let alone negative.
But surely all of this makes you think?
While there is an argument for passive investing in this thought piece (own the market and you will own the winners amid the churn of the index), there is also an argument that the old adage that the best period to hold a good investment is ‘forever’ is increasingly risky . . .
The world’s increasing rate of change and the pressure it is creating on businesses means that, as investors, we need to watch our existing investments more closely and, indeed, we may even end up holding these investments for shorter time periods as exit discipline is becoming more and more important as the average lifespan of companies shrink. If 75 percent of the companies currently quoted on the S&P 500 will have disappeared by 2027, I hope you will have sold your shares in them long before then . . . — Moneyweb
