Business will never go out of business
Benjamin Roth was a lawyer in Youngstown, Ohio, when the stock market crashed in 1929. Two years later he decided to keep a diary to detail the effects that the financial collapse had on himself, his neighbours, and the nation. Mr. Roth kept his diary for ten years. In the late 1930s, when the depression had mostly passed, he summarised a few points he had learned from the experience. He wrote:
“Business will always come back. It will remain neither depressed nor exalted…. Depression is a time of greatest profit. The investor who has liquid funds and the courage to act can lay the basis for great profits.”
If I could summarise these words of Mr Roth, I would say, “Whilst any business can go out of business. Business itself will never go out of business.”
In a recession (or even a depression) some businesses will fail. They could be businesses chasing unprofitable objectives, businesses overloaded with debt or businesses shackled with poor management. The odds of those businesses failing will be reflected in their price. Each day, every day, the share market is weighing those odds and pricing them accordingly.
But one thing is 100% true. That business in the general, the trading of goods and resources, has never gone out of business. It stared down the great depression. It stared down World War 2. It stared down the oil embargoes. It stared down the global financial crisis. And it will stare down the pandemic of 2020 as well.
The chart below illustrates the point. It shows the growth of various financial market assets over the last 90 or so years.
There are many things that could be learned from this chart, but today I’d just like to make the most obvious of points. All lines trend up. Business has never gone out of business.
Now it must be observed that many businesses have failed in the last 90 years. In fact, only about 10% of the original list of S&P 500 firms are still in the S&P 500 today (1). Yet, for each firm that came and went, another took its place. That’s no concern to diversified investors. An investor who did little else but invest in the index earned about 10% per annum (represented by the large company line above). It didn’t matter to them that 90% of the businesses came and went. Sure, many businesses failed. But business never went out of business.
Fortunately for our investors this is the way their portfolio is structured. They don’t own a single "business" as much as they own “business” in general. In their portfolios they own over 8,000 companies traded in over 44 different countries with operations extending around the planet. In effect, they own the power of global capitalism to produce and manufacture goods and services that people want to pay for. This investment has had its up and downs. But such an investment has never failed. Through each and every crisis throughout history, business has survived and thrived every time.
So, let’s again quote Mr Roth above, “Business will always come back.” And because it will always come back Mr Roth’s second observation is also true. When things are bad and prices are low, “The investor who has liquid funds and the courage to act can lay the basis for great profits.”
It was true in the 1930’s and it’s just as true today. Because if history tells us one thing, it's that business will never go out of business.
Ben Brinkerhoff
Head of Adviser Services, Consilium