Survival of the corporate apocalypse
What we can learn from the Nifty Fifty at a time of great change
Are you familiar with Nifty Fifty? If you are, the story you have likely heard is of a bubble in corporate tech stocks that collapsed in the 1970s. However, when you look more closely there is a different story that anyone working for a modern corporation really should consider. An alternative narrative is that the Nifty Fifty were the survivors who thrived after one of the last century’s great inflexion points: the story of recognising turning points, being aware of them and adapting, individually, as corporations and as countries.
The Nifty Fifty were a list of fifty companies recommended by a famous investment bank, Morgan Guaranty Trust (known today as JP Morgan) that many point to as a ‘bubble’ that collapsed in the 1970s. When you list them (Coca Cola, Black & Decker, Walmart, etc - see the full list at end of the article) they are a who’s who of modern blue-chips.
Their story should be one of success, not a bursting bubble. And equally, it should be a story of the companies that we don’t know of, and who didn’t keep up with change. This is the corporate analogy of the WW2 story of the ‘bombers that returned’ and survivorship bias. In the analogy, there was a proposal to place more armour over the areas where returning planes had been shot. However, an astute analyst observed that these were in fact the planes that did return, and so perhaps the armour was needed in the other areas (where there were no bullet holes - wiki article) .
And so it is with corporations. We see the survivors, and a disproportionate number of them were in a group known for being overvalued and in a bubble. Perhaps they weren’t, and investors just recognised that they were the ‘future’.
When you look below the surface, what you see are companies that did have historically high share prices (by conventional measures like price earnings multiples), but they also had the right strategy for the pivotal event of their era: globalisation and evolving capital frameworks. And so most are household names today. As the decades rolled on and as the technology era accelerated, more fell by the wayside. E.g Eastman Kodak wouldn’t keep up with the digital camera. Xerox and DEC are other victims of technology. However, most of the Nifty Fifty did fine in the decades to come.
Looking at corporations differently
The parochial market parlance for analysing these undulations, revolve around share prices, the company’s earnings and then various financial metrics and ratios. The tricky bit for companies is projecting these ratios out many years. They are done with spreadsheets, where equity analysts input variables like ‘growth’ and ‘future dividends’, that are very hard to project.
And yet whilst being hard to estimate, they undoubtedly make up the vast majority of a company’s value: a real dichotomy. In simple terms the future profit of a company is hard to estimate, but that value (of the total of future profits), almost certainly, makes up most (over 90%) of the share price.
Both of those future earnings metrics are at serious risk at inflexion points: i.e. the future growth and earnings depend on how a company reacts at a key historical turning point. If it reacts badly at an inflexion point, then the implications for future earnings is catastrophic. Fortunately, as individuals within a company you can get a natural sense of how a company is doing. It is strangely related to abstract ideas like merit, team performance and management.
As an employee, or better member of management, your obligation is to figure out how to make your company one of those that does thrive at a time of change. Of course, that is rarely up to an individual, but more about a collective culture that is capable of communicating, being meritocratic and making decisions at difficult times.
As an individual, it would be helpful to figure out if you are in one of the companies that is going to make it. We have our own process for thinking about this problem and will set it out in articles to come. As an individual, if you are in a company heading in the wrong direction, then the question is where to jump to.
The goal of this series of newsletters (and associated publications) is to explain why we believe the world is changing fast. In future articles we will grapple with the ‘how’ to try and address it. So first we need to understand why this is an inflexion point .
Why focus on corporations?
Corporations matter in our system. They employ people, through their metrics we can analyse the world, and they are the primary private sector vehicle of commerce. We aren’t fans of all they do, but for four hundred years corporations have been a major vehicle of economic collaboration (with individuals and states being the other two blocs).
What is interesting about the 1970s is all the companies that didn’t make it. The Nifty Fifty, disproportionately make up the survivors, and markets seem to have spotted that. Today, we have the tech magnificent seven (or eight), that seem to be single handedly dragging the performance of the S&P 500 up. However, once again, when you study the productivity and intellectual properties of these handful of companies, it is easy to see that they are head and shoulders above their peers. A great example of this is how quickly Google released its Bard product, once Microsoft (that bought OpenAI), released ChatGPT. I.e. Google had the Bard product in its Google X (R&D arm) ready to go. We have mere rumours about the other technology genies waiting to escape.
However, for all the fast moving innovation of the winners, those left behind are encumbered by many of the opposite traits: primarily poor politics, that then drives decision making and performance. Few institutions consider the nexus of geopolitics, tech and finance and have a long term strategy, and at times like this that is certainly something to consider.
Why it is an inflexion point
Changes to money (and relatedly capital)
The 1970s were similar to today, in that it was an inflexion point. Perhaps not as big an inflexion point as today, but it was one. Two major aspects of the economy were changing. The first was money, as the world, via the US Dollar, came off the gold standard. The second was globalisation, and the expansion of the International Rules Based Order, built on pillars like the UN and the Washington Consensus.
With the Cold War in full throttle, the future was far from clear, but in the NATO bloc, the integration of cross-border markets was the trend. Companies that understood these trends, and implemented the apt strategies did rather well. However, and perhaps this is more obvious with hindsight, geopolitics wasn’t of much consequence.
The Soviet Union even at its peak was just 44% of the US economy (let alone the vast trading bloc the US promoted), and by the 70s Solzyntysen’s, Gulag Archipelago was revealing the crumbling, totalitarian state behind the shiny facade. This time around that aspect is quite different. China already has the same GDP as the US, and by some estimates less than 40% of the population has made the ‘transition to the modern economy’. Geopolitics really matters now.
No, the changes of the 70s were relatively prosaic. Money changed, after we left the gold standard (the US dollar was linked to gold, and the other currencies around the world to the US dollar), it created a banking crisis in the 70s, that was easily dealt with due to low levels of debt, and the Bank of International Settlements would create the Basel regime. So money changed again. As the Basel regime, essentially governs our money. That is because in most developed countries, over 95% of money is currently bank deposits. Consider for a moment how much of your wealth is stored in cash. In fact, in the EU it is illegal to pay for anything with more than EUR 1,000 of cash.
The Basel regime changed again after the Great Financial Crisis, so changing the system of money. The changes would not have an observable impact on consumers, and users of modern money, but it did impact how loans were made and so the drivers of money creation. More on that in the future. However, today the most significant change to money is imminent, in Central Bank Digital Currencies, a function of new technology: blockchain.