Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Investment Lesson Behind the Kodak Bankruptcy

Companies / Learning to Invest Feb 10, 2012 - 06:42 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: The recent bankruptcy of Eastman Kodak reminds investors they don't make companies like they used to.

Founded in 1892, Kodak shows that very few of these 19th century giants exist anymore.

Companies, like washing machines, just don't have the staying power they used to. Even the largest companies these days are unlikely to outlast a 40-year investing career.


The evidence for this increased corporate mortality rate is both substantial and startling.

According to John Hagel III, Co-Chairman of Deloitte LLP Center for the Edge and author of "The Power of Pull" (Basic Books, 2010), the lifespan of such companies is now about 15 years. That's a stunning change from 1937 when the average life expectancy of the companies in the Standard and Poor's 500 Index was 75 years.

A similar 1983 study of the 1970 Fortune 500 found the life expectancy of its companies to be around 40 years, with a third of them vanishing in the intervening 13 years.

Thus the progression from 75-year corporate lifespans to 40 and now to 15 since 1937 has been clear and more or less smooth.

The Kodak Bankruptcy is One of Many
Of course, not all these corporate deaths are due to bankruptcies - some of them are takeovers, which are much more common since the 1970s.

Even so, bankruptcy is not even enough to kill some companies. Think of the airlines, which have survived multiple Chapter 11 bankruptcies, staggering on like zombies through a fog of losses until - like PanAm in 1991 - somebody mercifully puts a silver bullet in their corpse.

Other companies disappear because they cannot cope with technological change. That is Kodak's problem, even though 120 years is a pretty good run.

However, entrepreneurs' motivations are different today.

Estate duties, which reached their current punitive level in Herbert Hoover's misguided 1932 tax increase, are another cause of short corporate lifespans. After all, if your company will be broken up on your death, you'd be wise to sell it in your lifetime and turn the money into a more liquid form.

The younger generation of entrepreneurs seems to have internalized this idea. Today, they go for repeated entrepreneurship rather than old-style empire-building.

Peter Thiel, for example, made his first billion when he sold PayPal to eBay Inc. (Nasdaq: EBAY). Then, instead of building a corporate behemoth, he used his money, skills and company-building know-how to jump-start several other companies, including Facebook and Palantir Technologies.

The corporate lifespan is thus much shorter than it was, and not likely to lengthen again.

As investors, that means we need to abandon traditional techniques of value investing. That's because in a short-lived corporate world, there are no long-term values in the traditional sense.

When companies do initial public offerings (IPOs), their first few years will be devoted to allowing the founders and venture capitalists to cash out. In this period, you can expect accounting shenanigans and short-term stock-price boosting games.

Then, after the founders have sold, the company may become a zombie, with their research and innovation capabilities sucked out, existing only until its cash pile runs out. Research in Motion Ltd. (Nasdaq: RIMM) and Yahoo Inc. (Nasdaq: YHOO) may have reached this stage, for example.

Short-lived Corporations and Your Investments
That has important implications for workers, but it can affect our investment decisions even more.

In a world of short corporate lives, here are a few investment strategies to consider:

1.Dividends: If a company pays a 10% dividend yield and lasts only 15 years, and liquidates for 20% of its current value, that would still give you an overall return of 7%, which beats fixed-income these days. Plus, if you're smart, you may be able to sell it for full value about eleven years later, before others have cottoned on to its decay. Energy Master Limited Partnerships (MLPs) like Linn Energy (Nasdaq: LINE) are excellent examples of this type of investment.
2.Bargains: If you buy something for 50% of its net asset value, and the company is making profits, you will probably end up making out on the deal when it is sold off or wound up. In this case, the income may not be worth much, but the assets are.
3.Fast growth: If you are really convinced the company's profits are going to explode, and you're buying on a fairly cheap price/earnings (P/E) ratio, you may be able to ride the rocket. But don't pay too much, and don't forget to jump off when the rise seems to be slowing.
4.Family companies in family-oriented cultures: Other countries don't have the same estate taxes, are more family-oriented, and are less attracted by get-rich-quick schemes. In Germany or Japan, corporate lifespans have not shortened to the extent they have in the United States. In general, emerging markets are more long-term oriented than the U.S., although their political and economic risks may kill companies before their time.

In general, avoid companies that do not pay dividends. There will be cases of companies, especially in the tech sector, which enjoy an entire corporate lifespan of say 20 years without ever paying anything to investors who are not insiders with stock options. Don't be the sucker that buys these empty bags at high prices.

Also avoid well-established blue-chips, the equivalent of Kodak, which tend to be priced as if they will last forever, and whose dividend yields are not enough to compensate you for their now-shortened lifespan.

To take one example at random: The Procter & Gamble Co. (NYSE: PG). PG has been around since 1837. It is a perfectly good company, but its 2.1% dividend yield won't compensate you adequately unless PG makes it to 2060. History tells us it may not.

So while, shorter corporate lifespans may well speed innovation, they make being an employee or an investor much more difficult and dangerous.

Investors should recognize this and adjust their strategies accordingly.

When the times change investors need to change with them. That's the lesson behind the Kodak bankruptcy.

[Editor's Note: Today, S&P 500 companies have a record $5 trillion on their balance sheets. That's twice the total of just a year ago.

But it's how those companies use that cash that will determine whether the stock is a buy, sell or hold.

In today's Private Briefing, Martin Hutchinson shares a secret showing you how to determine which cash-rich companies will provide maximum gains. To find out more, please click here.]

Source http://moneymorning.com/2012/02/10/fuzzy-math-greater-fools-and-facebook-ipo/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive



© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules