While going through some old boxes I stumbled across my investment research records going back to the 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. A flood of memories returned as I reviewed the symbols of hundreds of the biggest companies of the day, many of which have since faded away into stock market history.
One such company symbol was that of Eastman Kodak. Formed in the 1800’s, Kodak had been a pioneer and innovator whose products have brought tremendous value to all of our lives. Despite its contributions to the world, Kodak eventually filed for bankruptcy and was removed from the Dow Jones stocks as new technologies replaced Kodak products. The process by which this happens in a free market is known as Creative Destruction which is essentially when new innovations replace and make obsolete older innovations.
Creative Destruction sounds like an oxymoron, but it is in fact a critical, though painful element of a free market. Kodak laid off thousands of workers but ultimately those jobs were replaced with higher paying tech jobs and photographic film was replaced with digital photos. Kodak shareholders lost their investments but the smart phone photographic technology that ultimately replaced rolled film has added to the world’s investment wealth in ways the Kodak of the 80’s could only dream of.
This month the DOW Jones Average announced some changes, one of the biggest being that Intel (INTC) would be replaced by NVDA (Nvidia). That is significant since Intel played such a key role in the tech era, producing products that most everyone in the world was touched by. Creative destruction plays no favorites as today’s industry darlings are always at risk of being replaced by tomorrow’s startups. Though Intel is still a large and viable company, the removal from the DOW indicates that creative destruction continues its relentless march.
Looking through my old trading books I realized how very 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 a sobering reminder to investors of the risks of not paying attention to what they own.
Creative destruction often becomes more prevalent after a presidential election. The incoming administration usually has its own goals and ideas to implement, with a new economic direction to take the country. These political changes have the potential to change the investing landscape and allow companies to rise and fall in relation to government action. This risk increases when the incoming administration has significantly different plans for America. For this reason, investors should consider the next couple of months a critical time to have their investment portfolio reviewed to see it there are any changes that make sense.
Whether the cause be political, social or just plain technical advancement, the free-market system works well 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 tries to build a newer, safer, more efficient one in its place. I generally advise investors that for many positions, buying and holding a solid investment can be a good idea. But this does not mean to hold forever. One must always be aware that eventually, pretty much everything gets replaced. If you haven’t had your portfolio reviewed in a while, now might be a good time. Otherwise, you may find yourself holding an Instamatic camera while rest of the world is taking pictures with AI driven smart phones.
Dan Wyson, CFP® is a long running national financial columnist, author of several books and CEO/Founder of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor. *We use INTC and NVDA as educational examples only and are in no way making an investment recommendation regarding either company
