Have you ever felt that the speed of change in our world is on the rise? This shift is propelled by technology that builds upon itself to progress further.
This illustrates the idea of compounding—similar to any exponential function, it shows that technological breakthroughs happen at increasingly rapid intervals (see Moore’s law).
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Take a look at:
The technological singularity signifies the moment when this ‘rate of change’ reaches a vertical trajectory, indicating that technological evolution becomes instantaneous, simultaneous, and boundless.
While this remains a purely theoretical notion and seems improbable, it offers an intriguing perspective on how swiftly the world is transforming.
Another lens through which to view this transformation is by analyzing the average longevity of prominent companies within the S&P 500 Index.
Here’s a revealing quote 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 is illustrated below, clearly depicting the trend of decreasing company lifespans:
Average company lifespan on the S&P 500 Index from 1965 to 2030, in years (rolling seven-year average)
Source: Statistica
However, in the US market system, where lobbying is prevalent, larger companies with more substantial lobbying resources often receive favorable laws and regulations. Concurrently, the growth of passive investing tends to advantage those firms with higher market capitalizations, resulting in increased passive acquisitions of their stock through indices.
These two dynamics clash with the trend illustrated in the graph, revealing that the lifespans of large corporations are indeed dwindling.
So, what factors might be driving this trend?
The only explanation that comes to mind is that the pace of technological advancement is accelerating, thereby increasing the likelihood of substantial disruptions to older, larger, and often more sluggish blue-chip companies.
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Perspective
The four oldest companies in the S&P 500 are AT&T, ExxonMobil, Coca-Cola, and Procter & Gamble (General Electric has since been removed from the index!). It’s worth noting that these four stocks are not among the largest in the index, with ExxonMobil being the most significant at only a 0.95% weighting.
Logically, there are intrinsic frictional costs associated with technological progress that hinder the rate of change from achieving a vertical shift.
Additionally, there are practical constraints regarding the lifespans of companies that prevent the anticipated lifespan of a successful business from plummeting excessively, let alone becoming negative.
But this certainly raises some questions, doesn’t it?
While one could advocate for passive investing within this context (holding the market enables participation in the growth amidst market fluctuations), there remains a valid concern in the age-old belief that retaining a strong investment indefinitely is becoming increasingly risky…
The swift progression of change across the globe and the stress it places on businesses signify that, as investors, we need to observe our current holdings more carefully and might have to adjust our holding periods as exit strategies become paramount with the declining average lifespan of companies.
If it’s true that 75% of the firms now listed on the S&P 500 are expected to cease operations by 2027, I hope you will have sold your shares in those companies long before that time frame.
Keith McLachlan is the Chief Investment Officer at Integral Asset Management.
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