Goodbye to long term investing in individual companies!

Corporate vs. Human Life Spans

The Fiscal Times reports that public companies now have an average lifespan of only 30 years, much shorter than in the 1980s, and shorter still than in the 1950s when much of today’s still cited market wisdom was coined, such as buy and hold.

There is a similar chart in The Equity Premium Puzzle (older edition available immediately) in which I show similar data, but not current through 2015, and only for the S&P 500, not the 30,000 companies in this study.  I go on to analyze the effect of this on returns, and posit some reasons for it.  It is not healthy. The S&P data I presented was lifetime on the S&P 500 list, not lifetime of the company itself, but it indicates a decline in the company.  That number was a mere 18 years.

When those companies fold and the jobs are lost, the skills are probably not applicable anymore either, and employees have to pay for additional education, during which time they lose earnings and incur debt, or accept a permanent lower income.  If one invests in a broad based index the equity premium at a time horizon greater than 20 years is still applicable, and I believe it will continue to be.  In general businesses will make money, or people will not start new ones – in which case the lifetime of the old ones will increase again.

But as for buying and holding individual companies, like people used to do, especially in their retirement plans?  I suggest forget about it.

Consider the previous post today on MORL.  This is a basket of companies, not a particular company.  It has some limitation in that the basket does not rotate in new companies like an S&P 500 ETF would.  However, at the yield MORL typically pays, you get your capital back in 5 years and you still have whatever residual value the equity is, which is a profit even if it has declined.

I have an online simulator of Perpetual Portfolios, which allows you to factor in the lifetime of a basket of companies.  You estimate growth and decline parameters for the average company, provide a rate at which you expect to rotate in new companies, and it calculates the average returns for various holding periods and various numbers of companies in your basket.


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