On a Long Enough Timeline, the Survival Rate for Every Investment Drops to Zero.

All investments die. 

Given enough time, it’s clearly true.  Eighty seven percent of Fortune 500 companies from 1955 are no longer around.  Buying a portfolio of the 500 largest companies in 1955 and holding them until now would have been a poor idea.  Kind of makes you wonder why “buy and hold” is such a popular concept.  Yes, the 13% winners have probably made some good money, but they too will fail.  It’s only a matter of time.

The failure rate of investments is accelerating. About half of the S&P 500 companies will likely leave the index in nearly 20 years, up from 33 years in the 1960s. Now this doesn’t mean the companies are worth zero yet.  But it’s not implying good heath for many of these firms.

Sovereign (national) bonds aren’t necessarily any better.  Nearly every country has defaulted at one point. One hundred and eighty five countries defaulted in the last 100 years. National bonds fail much less frequently than stocks, but they still happen – the British being the exception to the rule.  A hundred years from now, likely 50% of all countries will default on their debt again.  Buy and Hold might not work here either.

Is there any investment that doesn’t ultimately become worthless? The two possible exceptions might be gold and land.  But even land usually comes with carrying costs due to taxes, likely ensuring this investment will ultimately lose money as well.  Gold costs practically nothing to store, and doesn’t degrade, which is why it ended up becoming “money”. There’s always one exception.  But this isn’t a gold post.

Should You Just Give Up?

How do you wrap your head around the inevitability of failure of the majority of our investments?  It seems depressing. While I don’t recommend you buy gold and bury it in the back yard, there are two key takeaways from this thought experiment that will improve your ultimate understanding of markets.

First acknowledging the death and destruction in the investment world emphasizes how the stock market index is not representative of the market.  Precious few investments outperform the trading strategy known as a market index.  For an individual stock, there is nothing average about a 11% return over the last 40 years.  Especially when you realize the “median” stock died.

Don’t give up, there is hope for your investments.

Secondly, and more profoundly, you should further grasp the absolute importance of the geometric average to investing (as well as life).  I’ve interpreted the quote from Chuck Palahniuk ‘s Fight Club – which I tweaked for the title of the post – to exemplify the importance of long-term time averages.  It’s effectively a statement saying the geometric average of everything is less than zero.  Mostly things will grow (positive arithmetic average), but over time, the volatility will get to you.  It’s inevitable. It always does.

In light of this insight, if we’re going to model investments as random shouldn’t you logically conclude all investments have a negative geometric average?  It explains how an investment can be simultaneously random, guaranteed to grow, and guaranteed to die over their life.

How to Invest?

Let me clarify this thought experiment a bit.  By negative, I mean a negative “real” rate, i.e. less than inflation (or the risk free rate).  And it doesn’t have to be very negative, just enough that investors will ultimately decided the return doesn’t justify the risk. Evidence indicates this very well may be the case as 58% of stocks don’t keep up with the treasury bill’s return.

Now honestly, I’m not 100% sold on this concept yet. I’m still studying it. But logically it really does hold up doesn’t it? Due to their inevitable demise, investments should be modeled with a negative geometric average.  And if you’re going to model the investment landscape this way, you absolutely have to invest in a strategy focused on the long term geometric average.  It doesn’t matter if the strategy is index investing – which is unknowingly structured to slightly profit in a negative geometric environment – or a more advanced Kelly Criterion based strategy like Geometric Balancing. Everything else will lead lead to ruin.

All investments fail. Even the Mona Lisa is falling apart.

2 Replies on “On a Long Enough Timeline, the Survival Rate for Every Investment Drops to Zero.

  1. The Mona Lisa really is a subpar painting.
    There is a story about why it is famous that mostly resolves to “it is famous for being famous”.

    In poker, the rate of “bad hands” to “good hands” is not as important as the discipline to fold the “bad hands” and the ability to maximize gain from the “good hands”.

    The S&P 500 is less of an index and more of an algorithm managed hedge fund.
    How many of S&P 500 actually go to zero while in the S&P 500?

    My guess is zero.
    The S&P 500 swaps out falling sticks for rising stocks regularly enough that “everything eventually goes to zero” is less of a concern.

    Especially if your actually investment is a mural find tracking the S&P 500.

    The main value I can see from your point is that “buy and hold” long term investing should not be “buy and hold forever”.

    Also that single stock investing should not be passive.

    1. Agreed with your point on the S&P 500. That’s why I grouped it in with strategies focused on the long term geometric return.

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