A friend of mine recently tweeted pages from old copies of financial publications from the early 2000s. What struck them, and me, was that most of the stocks being mentioned less than 20 years ago no longer exist.
In only a few decades they’ve been taken over or, as is the case for most of them, just delisted and left the JSE. I also remember a JSE handbook from the mid-1980s that I saw a few years back, which included the Top 40 stocks at the time. Again, very few of the stocks mentioned back then were still listed on the exchange.
This got me thinking about two things. Firstly, it raises the question: Is this a uniquely South African situation? And secondly, how should this help inform our long-term investing decision process?
With some digging, I found research from QAD looking at how long the average S&P 500 company remains in that index. There are two observations. Most importantly, the duration a stock remains in that index is currently reducing, after peaking in the mid-1990s when companies would remain there for over 60 years. It was a blip higher in the early 2000s, just after the dotcom implosion.
The expected duration is now sitting at around 20 years – which one would think is a fairly short lifespan.
Of course, the stocks leaving the S&P 500 do not disappear. They usually continue being listed, but they might be smaller and will therefore be residing in a midcap index.
The authors of the report mention disruption as one of the key drivers of the shorter lifespan within the index. While that makes sense, I also think it has to do with some of the very speculative stocks that have entered the index before their valuations came crashing back to earth (think, for example, of the dotcom boom in the US and the local commodity boom in 2007).
But whatever the reason, it does show that our local JSE is not alone in losing stocks, both from the index and the exchange itself.
The second and bigger issue is how do we undertake true long-term investing in a world where stocks keep disappearing or, at best, losing their shine and their valuations?
In many ways this is at the heart of investing – finding those long-term winners. The idea is to buy great, quality stocks and put them in your bottom drawer, only returning to them in decades’ time to see great returns. But while this is true in theory, it’s hard in practice – as the above research shows.
Firstly, you need to avoid speculative and cyclical stocks. Sure, they do great at times, but they lack consistency and that can lead to holes in your portfolio when the bad times arrive, and the stock ends up crashing (or delisting).
We also need a process whereby we check in on our stocks to make sure they’re still the great long-term investments they were when we bought them. I use the cheat sheet I created when I first bought the stock. I refer back to the cheat sheet to ensure that the stock remains the great investment that I invested in. In short: I check that my reasons for buying remain valid.
Another trick is to start afresh with your research and see if you’d still buy the company today, assuming a valuation you are prepared to pay.
Lastly, it is also important to admit that many of the failures from our exchange have been with small and midcap stocks. This makes sense as smaller stocks usually come with more risk.
I manage this risk by mostly focusing on large stocks, with a small scattering of smaller stocks that I monitor very closely and usually keep for less than a decade. In other words, I buy them expecting to have to sell them one day and then I monitor them for when to sell.