7-The Failure Behind Progress
Bear Stearns is gone. The explanation is in my old neighborhood.
Recently I had the time to visit my old neighborhood in New York, a typical set of brownstones on the upper east side of Manhattan. I lived there for two years nearly forty years ago. When I returned there, I entered a sort of time warp. Most of the buildings looked the same. The streets looked the same. The cars, if I ignore make and slightly smaller shapes, looked very similar. The laundromat I used still resides on the corner. Across the street was the deli owned by the same family who owned it those many years ago. Further up the street was a tiny grocery store where I used to buy the Sunday New York Times. But that had changed. Instead of the old Italian proprietor, the store is now under the management of an attractive thirty-something young couple.
But, really, a great deal had changed over these years. Virtually all of the other businesses that I had known and used were gone. The Carvel ice cream store was gone, but a few blocks away there is a Ben & Jerry’s. The once-new multiplex movie theater has been replaced by a Best Buy. None of the bars and restaurants I once frequented remained with the same name and ownership. All these things had changed. The old were gone, replaced by the new. Judging by the scant survivors, failure seemed to be the rule of the day.
McKinsey found the same thing on a much larger scale. A few years ago, McKinsey did an analysis of the original members of the S&P 500. This 500 company membership index started in 1957. Forty years later, in 1997, McKinsey found that only 15% of the original 500 companies were still among the S&P 500. And of those 15%, or 74 companies, only 12 had outperformed the average in the stock market. That’s only 2% of the original 500 leading companies. Not all of those companies have gone away. Some, of course, have gone away. Others have just slipped quietly out of the 500. They, like my old restaurants and businesses in New York, have been replaced by new companies.
We are, physically, better off from all this failure. Though, psychologically we seem to have progressed fairly little. Real, that is, inflation adjusted, per-capita consumption has doubled since 1970. Using a narrow focus to illustrate this phenomenon, you can see that most college kids have their own ipods, cell phones, flat screen TVs, DVD players and laptops. They choose from a wider variety of cuisines in their dining halls. Their rooms and accommodations are far better than their peers of forty years ago. Still, as much as the Vietnam generation felt that the country was falling apart, so these young people of today fear for the country’s future.
I have come to see it differently. Somehow or other, we have overcome most of the challenges that we faced forty years ago. Most of the challenges we have not overcome, we have surely made progress in addressing. By almost every measure of physical comfort, we are better off now than we were then. I am sure we will meet today’s challenges equally well. But along the way we are going to have to allow for failure…failure of ideas and failure of companies. Failure is the rule, not the exception, for companies and ideas. But out of these failures comes progress for us all. Bear Stearns is dead, long (whatever “long” is) live private equity firms!
Failure is still the name of the game. A 2018 analysis found a range of 20 to 30 annual changes to the S&P index. Some are due to changes in performance and market cap, but most are the result of acquisitions and mergers. A few result from bankruptcies.
In the longer term, failure is the rule not the exception, especially in difficult markets. Success takes enormous discipline and consistency through both up and down markets. See HERE for what we mean and some examples.
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