I stumbled across some old boxes from my investment days dating back to the early 80’s. I found dozens of notebooks on which I had written down my daily market trades. Every page was filled with stock ticker symbols and pricing, as well as the financial results of each transaction. I smiled as I remembered that in those days we traded in 1/8 dollars, as compared to today when stocks are priced in fractions of a penny. A flood of memories returned as I reviewed the symbols of dozens of the biggest companies of the day, many of which have either faded away or are a mere shadow of their former selves.
One such company was Eastman Kodak. Formed in the 1800’s, Kodak was a photographic pioneer whose name was as synonymous with cameras as Kleenex is with tissues. Having filed for bankruptcy years ago, the now privately held Kodak Alaris company that remains, no longer makes cameras. The collapse of the Kodak camera and its replacement with the far better technology of our digital age is known in the economic world as “Creative Destruction.”
Creative Destruction sounds like an oxymoron, but it is a critical element of a free market. In its simplest form, it is the process by which that which is old is torn down and replaced by something newer and better. It can be a painful process with loss of jobs and share value, but like tearing down an old warehouse to replace it with a new high rise, the process brings opportunity and benefit to society.
Looking through my old trading books I realized how hazardous Creative Destruction can be to an investor. Had I just bought and held many of those stocks that made me money decades ago, I would be holding an awful lot of worthless paper today. It is sobering to realize that with the dropping of General Electric just weeks ago, the Dow Jones Industrial Average Index no longer contains any of its original 12 members. The once powerful companies have all fallen victim to Creative Destruction.
The free market system works because it generally only destroys a company when it has something better to replace it with. It doesn’t just tear down the old factory, it seeks to builds a newer, safer, more energy efficient one in its place. Investors who prefer a long term “buy and hold” (and sometimes forget) strategy would do well to consider the history of the markets. As free markets create and destroy companies on a regular basis, investors should be active in monitoring their investments for signs of trouble, and opportunity.
My notebooks reminded me that investing must be a proactive process. It takes constant research and education to stay up with our rapidly changing investing environment. To think otherwise is to find yourself after your family vacation looking for a store to process your roll of 110 film. If you do not know what 110 film is, then I rest my case.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
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