Look Around – Great Advice

Look Around – Adam M. Grossman  |  April 12, 2020

WHEN I WAS in grade school, I remember a field trip to a highflying local company called Prime Computer. At the time—it was the 1980s—Prime was a Fortune 500 company with a popular line of minicomputers and a runaway stock. Today, Prime is long gone and barely remembered. A Wikipedia page is about all that remains. For a long time, I didn’t understand this. How could a company so successful simply cease to exist? Prime, of course, isn’t alone in this phenomenon.

The same thing happened to Blockbuster, Borders, Compaq and many others. I didn’t learn the answer to this puzzle until many years later. In his book The Innovator’s Dilemma, Harvard professor Clayton Christensen provided this counter-intuitive explanation: When successful companies fail, it’s because of their success.

What happens is this: As a company’s success grows, it pours its energy into doing more of what made it successful in the first place—building the next iteration of its product, then the next and then the next. But as the company does this, its focus becomes more and more inward. And when it does that, it ignores the proverbial entrepreneur in the garage—the upstart competitor who is able to look at things with fresh eyes and thus develop something completely new.

Christensen died in January. It occurs to me that his concept of the innovator’s dilemma has special relevance today, as we struggle with the effects of the coronavirus. At its core, Christensen’s warning to companies was that they need to avoid being too narrowly focused. This advice is also valuable for other spheres of life, including personal finance. Below are three specific aspects of personal finance where I believe you can incorporate Christensen’s thinking.

1. Investing. I often advise against stock-picking. The stock market’s behavior this year helps explain why. At its lowest point a few weeks ago, the S&P 500 was down 34% from its Feb. 19 peak. But that was just the average. Across companies, there was—and continues to be—wide disparity. Airlines, hotels and cruise lines, as you would expect, fared much worse than average. American Airlines, for example, dropped 64%. Meanwhile, other companies performed far better. Amazon lost just 12%. Pharmaceutical companies, which are on the hunt for a coronavirus vaccine, actually saw their stocks rise. Companies in the videoconferencing business have also done very well. Why am I mentioning this? Christensen’s point was that companies run into trouble when they ignore upstart competitors.

But the reality is, competitors are just one of the many unpredictable factors that impact companies and their stocks. Today’s public health crisis is the latest example. Looking back over the past 20 years, we’ve also experienced war, terrorist attacks and a financial panic. They each came out of nowhere and each impacted different stocks in different ways—some positive, some negative. This, in my view, is yet another reason to favor index funds over individual stocks or actively managed mutual funds. It’s just too hard to know what the future will bring. To be sure, a few hedge fund managers have been proudly trumpeting their foresight in shorting stocks this year. But there’s a reason you can count these managers on one hand. For most people most of the time, it’s impossible to predict what’s coming.

2. Household finances. Later in his career, Christensen co-authored a follow-up book, The Innovator’s Solution, to help companies avoid becoming the next Prime Computer. While there was no silver bullet, he provided more than a dozen recommendations. His overall message: Never rest and never accept the status quo. While these may sound like platitudes, there are many ways to apply these ideas to your finances. Got more free time during this work-from-home period? Here are some specific steps: Look into refinancing your mortgage.

While many people just leave their mortgage on autopilot, this is an area where you could save tens or even hundreds of thousands of dollars over time. For a few weeks recently, banks were raising mortgage rates, despite the Federal Reserve’s actions to lower interest rates. But things have started to turn around, and I’m now hearing of very attractive rates.

Don’t ignore smaller expenses. As Benjamin Franklin pointed out, “A small leak will sink a big ship.” I would scrub your credit card bill for all the little recurring expenses that, in aggregate over time, might not be so little. Among the recurring charges you choose to keep, consider moving them to a separate credit card so you can keep an eye on them more easily. Tried software like Quicken but found it too tedious? Check out newer tools such as YNAB and Tiller Money. If you find a budgeting system that works for you, it can pay big dividends, while helping you to feel a greater sense of financial control.

Read the rest of the story at the link below 

Source: Look Around – HumbleDollar

4 comments

  1. Don’t always agree with Jim Collins, but he wrote a whole series called “Good to Great” – including Built to Last and How the Mighty Fall. See: https://www.amazon.com/gp/bookseries/B07NZX6SFG/ref=dp_st_0066620996

    However, turnover or “creative destruction” is actually the norm, it is the exception when a firm can sustain excellence. Only 12.2% of the Fortune 500 companies in 1955 were still on the list 60 years later in 2015 – that’s only 61. That number is down to the low 50’s – so, in 65 years, 90% of the companies on the original list have either gone bankrupt, merged with (or were acquired by) another firm, or they still exist but have fallen from the top Fortune 500 companies (ranked by total revenues). During that 65 year period, almost 2,000 companies have made the Fortune 500 list at least once. .However, only three companies have been #1 in those 65 years – GM, Exxon, Walmart.

    See: https://www.aei.org/carpe-diem/fortune-500-firms-in-1955-vs-2015-only-12-remain-thanks-to-the-creative-destruction-that-fuels-economic-growth/

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  2. Totally on board with owning index funds. Some reports suggest that only 20% of the manage funds beat their indexes. How am I going to do that well picking just a few stocks if the professional can’t get it right picking a diverse portfolio? They also have the time and research and still can get it right but I know that they are better than me. Somehow, according to the IRS, I lost “paper money” on a utility stock. I am not sure how that worked but it was ok with me when I didn’t have to pay long term capital gains. I made money year after year from the dividend.

    I did buy my wife one share of the most valuable stock in the world. It truth, it can’t be traded and pays no dividend, and has next to no rights, but it is one of the few stocks that still print certificates. My wife is not only a Green Packer fan, but she is an OWNER. How many people can say that they are part owner of a NFL team? Value of the stock – priceless in her eyes and I earn dividends everyday for that purchase. Happy wife, happy life.

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  3. Hubris is the downfall of many a great Upstart and I believe is the reason for these failures. Hubris is a dangerous cocktail of overconfidence, overambition, arrogance and pride fuelled by power and success. This combined with a big ego alongside contempt for the advice and criticism of others, hubris causes leaders to significantly overreach themselves, taking risky and reckless decisions with harmful, sometimes catastrophic consequences for themselves, their organisations, institutions, and even for society.

    The Ancient Greeks recognised its hazards and counselled against hubris in their myths and tragedies, often tying it to a reckoning meted out by the goddess of retribution and vengeance, Nemesis.

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  4. Both my wife and I worked for Prime Computer at various times from the late ’70s through the early ’90s. Your comment about inward focus is absolutely correct. The details of this slow-motion train wreck are fascinating in retrospect, but the combination of the underlying arrogance and inward focus of an astonishingly strong technical team and quite frankly what I would characterize as second-rate management who failed to steer the ship when it was obvious to many of the “little people” when it was pretty obviously adrift is at the root of most of the process.

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