Comedian Jay Leno used this line during his final show May 29th after 17 years as the late-night television king: “I’ve been doing this show so long that when I started my hair was black and the President was white.”
His observation points out two important realities.
First, this country elected a black president, something highly improbable 17 years ago.
Second, a lot can change in 17 years.
There is an important lesson for investors in all of this and that is you can’t (and shouldn’t) count on things remaining unchanged.
GM Bankruptcy
Our poster child (this week) for this truth is General Motors. GM was once the icon of America’s industrial might.
"What's good for General Motors is good for the country."
This quote was from former GM president Charles Wilson, although it is not exactly what he said, it is what has lived on.
When Jay Leno took over from Johnny Carson 17 years ago, GM stock was selling for about $15 per share (on an adjusted basis for splits and dividends).
The week Leno ended his show, GM stock closed under $1. In the intervening 17 years GM stock hit almost $66 (again on an adjusted basis).
Everyone has an answer for why GM went from the largest industrial company in the world to just another sad note in textbooks on why doing the same thing year after year while the world changes is a recipe for disaster.
Lesson for Investors
The important lesson for investors is that while “buy and hold” is still the best strategy for many investors, it doesn’t mean you should hop in a Corvair and ride it off a cliff.
For those who don’t remember the Covair, it was labeled a rolling death trap for its tendency to spin out and flip. The car did manage to springboard consumer Ralph Nader from obscurity to world fame after he featured the car in his famous book, “Unsafe at Any Speed.”
The list of mistakes at GM is long and involved.
Investors and analysts should have seen the disaster coming. GM built a line of trucks and SUVs, which were very popular for a time, however these products were predicated on cheap gas, cheap credit and an expanding economy.
As labor and health care costs soared, rivals ate away at GM’s loyal customer base. The combination of unstable and unpredictable gas prices, the credit crisis and a recession was much more than GM could handle.
Now would be a very good time to look over your holdings, especially those in your 401(k) or other retirement accounts and see if you have any potential GMs hiding there.
Ask yourself these questions about your long-term holdings:
- How are they faring in a down economy? This is about the company’s operations, not its stock price.
- What are competitors doing? Is the company two steps behind in technology, new products and so on?
- How was the company doing before Jan. 1, 2007? If they were struggling before the recession, they are probably in big trouble now.
- What will happen when the economy turns around? Will the company be ready to push forward or is it so weakened it will lack the strength to keep up with competitors?
Don’t assume the past is the future – it never is and never will be.
