That little wiggle you felt a few weeks ago wasn’t a result of overeating the day before. It was the world shifting. In a meaningful way.
As you may have heard by now, in May, Barclays downgraded Electric Utility bonds across the United States.
For the past several decades, utility companies of all stripes have been one of the best places to park money for safety and income. After all, turning off your power, water, or gas was the last thing you would do if you were in a period of financial difficulty. You might cut back on luxuries, wear your clothes another season, put off retirement savings(!), or even sell you car. By the time you get to the point of not paying your utility bills, you are in pretty dire straits; it’s one of the last places people cut expenses. Add to this the fact that if a utility get into financial trouble (whether of its own making or not) they have a great deal of power to raise their rates. The realpolitik of the situation is that the electric company has you over a barrel, and they know it. When you flip the switch, you want the lights to go on; it’s that simple. Most people will complain about price increases, but they will complain as they are paying the bill. Cutting out water, electricity and natural gas delivery to your home really isn’t something anybody ever wants to do. This is one reason that utility stocks are known as “widow and orphan” stocks; they’re as reliable as anything can possibly be.
Change isn’t bad for all companies. I remember visiting a historical park fifteen years ago, and setting eyes on a weigh-scale that had “International Business Machines” prominently displayed on it. IBM has certainly had ups and downs over the past century, but they are still very much a going concern. This is because they have adapted to changing times and have not gotten complacent with their business. IBM’s initial business has long since gone the way of the Do-Do, but not all companies are as nimble. It might be instructive to go through a list of previously great companies that have recently withered and died : Enron, Lehman Brothers, Kodak, Eaton’s, and RIM, currently hanging on by the skin of its teeth. But that’s not what this post is about. This post is about fearlessly predicting which currently-great companies (or industries) may stumble in the future. These predictions will all seem ridiculous now, and I’ll probably be wrong on most, if not all of them, but it’s still a good idea to keep an open mind about a changing world.
“Change is the only constant” is hardly a new sentiment, but it occurred to me after my rantlet (small-scale rant) on Monday that there might actually be something useful to learn from the situation. “Learn” might not be the best word; maybe the phrase “develop a deeper understanding of” or “get a new appreciation for” might be more suitable. Semantics aside, considering the decline of newspapers can lend some valuable investing insight. Simply put, don’t get too comfortable with any of your investment strategies or any of the companies you invest in. Eventually, change will come and if you’re not ready for it, it’ll knock you off your feet.
Because they’re so clever with oblique references, investors refer to companies that produce out-dated products as “buggy whip makers”. The metaphor is apt. As the world changes, the quality and price of a particular item becomes irrelevant if there is no more demand for it. Since the introduction of the new-fangled “horseless carriage” the buggy whip market just hasn’t been the same. So it is with VCR, typewriter, and slide rule makers. The lesson here for all long-term investors: There is no such thing as a future-proof company.