The Shortening Lifespan of Companies and the Crucial Role of Investor Exit Strategies

Do you ever get the feeling that change in our world is happening at a faster pace? This phenomenon is largely due to technology evolving at an unprecedented rate.

This illustrates the principle of compounding – similar to any exponential function, it shows that technological progress is happening at an increasingly rapid pace (see Moore’s law for more information).

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The technological singularity is theorized as a point when this ‘rate of change’ becomes vertical, indicating that technological change is instantaneous, simultaneous, and boundless.

While this is a speculative scenario and somewhat improbable, it presents a fascinating thought experiment regarding the rapid evolution we are currently witnessing.

Another way to understand this transformation is by looking at the average lifespan of major firms within the S&P 500 Index.

Consider this insightful statement from a McKinsey article:

A recent study by McKinsey found that the average lifespan of companies on the Standard & Poor’s 500 was 61 years in 1958. Today, it’s fewer than 18 years. McKinsey predicts that by 2027, 75% of the companies currently listed on the S&P 500 will have vanished.

This trend is visualized below, clearly showcasing the decline in company lifespans:

Average company lifespan on the S&P 500 Index from 1965 to 2030, in years (rolling seven-year average)

Source: Statistica

Nevertheless, the US market system, characterized by prevalent lobbying practices, often benefits larger corporations with substantial lobbying resources, granting them advantageous laws and regulations. Simultaneously, the trend towards passive investing tends to favor these larger firms with greater market capitalization, resulting in more passive acquisitions of their stocks via indices.

These two circumstances contrast sharply with the decline indicated in the graph, underscoring that the lifespans of major corporations are indeed shrinking.

What could be the reason behind this?

The only explanation I discern is that the rate of technological change is rapidly increasing, amplifying the likelihood of significant disruptions to older, larger, and generally slower blue-chip companies.

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Perspective

The four longest-standing companies in the S&P 500 are AT&T, ExxonMobil, Coca-Cola, and Procter & Gamble (notably, General Electric has exited the index!). Interestingly, these four firms are not the largest in the index, with ExxonMobil having the highest market share at just 0.95% weighting.

Logically, there are frictional costs associated with technological advancements that inhibit the rate of change from reaching verticality.

Additionally, practical considerations regarding corporate lifespans restrict the potential for successful firms to see their expected lifetimes diminish excessively, let alone go negative.

This begs the question, doesn’t it?

While it’s possible to advocate for passive investing in this conversation (owning the market allows for participation in its successes despite fluctuations), there’s a pertinent argument to be made that maintaining a solid investment indefinitely is becoming riskier…

The accelerating speed of change globally and the pressure it places on businesses mean that investors must scrutinize their current holdings more closely and might need to shorten their investment durations as exit strategies gain prominence with the dwindling average lifespan of firms.

If the prediction holds true that 75% of the companies listed on the S&P 500 are expected to cease to exist by 2027, I hope you will have sold your shares in them long before that prediction comes to pass.

Keith McLachlan serves as the Chief Investment Officer at Integral Asset Management.

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