On September 16, 1959, in a demonstration at the Sherry-Netherland Hotel in New York, the Xerox 914 copier was shown on live television and the world changed. The company transformed Rochester and minted multimillionaires along the way with its stock multiplying again and again. Two of the most revolutionary companies in history, Eastman Kodak and Xerox, both called Rochester home. For decades they were at the forefront of change and growth…until they weren’t. Today, both companies are largely irrelevant. A drive up to the Xerox campus brings about a sense of nostalgia. Parking lots with shuttle stops are mostly empty with grass growing through cracks in the pavement. At Kodak, the hulking chimneys are no longer billowing. It’s the equivalent of Microsoft and Amazon being in the same small city and then slowly shuttering as they fade away into obscurity.
This made me think again about a statistic that I read some years ago: if you were to list every species that has ever existed on Earth, from tiny sea organisms to the largest mammal or dinosaur, scientists estimate that somewhere around 99% of those four billion species are already extinct. In other words, as new species evolve to fit shifting ecological niches, older species fade away. Some 900 species have gone extinct in the last 500 years alone. What’s left today on Earth constitutes just 1% of everything and anything that ever walked (or crawled or slithered) on our planet.
The natural world is self-selecting, and the laws of the jungle can be… Darwinian. With that said, there is no perfect species. A species may strive for millennia by being good at some things until those things fall out of favor and are eclipsed by others. This idea stuck with me because the laws of the jungle also apply to business and investing.
Perhaps because of their extraordinary outperformance over the last decade, we’ve come across more and more folks with highly concentrated positions within their portfolio—think Apple, Amazon, Nvidia, etc. While there’ve been no better companies in recent memory to rapidly compound your wealth, I can’t help but think about extinction. Let’s examine this from another angle.
During the 1990s, some of the largest companies in the U.S. were Exxon Mobil, American Airlines, Citigroup, Ford Motors, General Electric, IBM, Transocean, U.S. Steel, Kodak, and Xerox. Even before the 1990s, this cohort made up the Nifty Fifty, an informal designation for fifty popular large-cap stocks in the 1960s and 1970s that were widely regarded as solid buy and hold stocks. These stocks were often described as “one-decision,” as they were viewed as extremely stable, even over long periods of time. These brands were global icons and beacons of American ingenuity and leadership… until they weren’t. The world shifted beneath their feet. J.C. Penney, the dominant retailer up until 2000 had a market capitalization of $20 billion. They exited Chapter 11 Bankruptcy proceedings in December 2020. Now, Kodak clings to life with its patents on certain chemical processes, toner, and inkjet components.
Today, it’s hard to see a future where Amazon or Apple suffer a crippling fall into oblivion. But they will, someday. Jeff Bezos himself readily acknowledges this fact. The rise and fall are the business equivalent of the circle of life. While extreme concentration (e.g., owning just a few incredible companies) can be the best way to maximize your returns, diversification is the best way to increase the odds of owning a company capable of delivering returns over long time horizons at all!
If 99% of the world’s species are no longer here, why wouldn’t the same laws apply to businesses, too? To this end, think about diversification. Don’t let a single company be the key to success or failure within your portfolio. Diversification is about admitting that we simply cannot fathom which company, asset class, or strategy will do the best in the future. Could you get lucky and have your entire net worth in the best-performing company or sector during an opportune window for your assets? Absolutely. But the problem with investing is luck and timing have more impact on your success than most investors are willing to admit.
As Morgan Housel wrote, “Just like evolution, the key is realizing that the more perfect you try to become the more vulnerable you generally are.” Diversify.
