Lesson in the Dow Jones changes

You may have heard that both General Motors and Citigroup were both removed from the Dow Jones Industrial Average stock index yesterday and replaced with Cisco and Travelers. The Dow, which has been around forever, is a list of 30 stocks thought to be representative of the U.S. economy and financial markets. The idea behind the DJIA, and any index really, is to give investors an overall view of the state of markets and the economy on a given day. So a change in the Dow means that something very significant is happening in the economy.

General Motors was one of the most profitable companies of the 20th Century. In the 1950s and the 1960s it was the world’s Microsoft – a virtual monopolist that could do no wrong. Half a century later and it has declared bankruptcy. Citigroup was the first company in history (to my knowledge) to have a $ trillion balance sheet!!! Now Citigroup is floundering, too, though not bankrupt. Now both GM and Citi are no longer considered representative of the U.S. economy. Frankly, GM’s slide took place over the course of almost 40 years, starting in the 1970s. So the more shocking of the two slides is Citigroup’s. Four years ago when I retired it was the most solid banking institution in the entire world. While not bankrupt, its decline was 10x as rapid as GM’s. I attribute this to the rapid decline that financial assets can experience vs. hard assets (like car-making robots). But this is not the interesting point.

The lesson for us as investors is that things inevitably change and that long-term sustainability in the business world is extremely difficult. I cannot emphasize this enough. This is easy to see when we look at the mismanagement of GM and Citi, but the lesson is most applicable to the companies that currently look gargantuan and immortal. How long would it take for Microsoft to disintegrate if there was poor management? How long would it take for General Electric to disappear if the world around it changed rapidly? How long would it take for Wal-Mart to unfold? While these things may seem unimaginable, that is exactly my point: as investors we must be ever-vigilant in our analyses. No company ever gets a free pass from our scrutiny.

Be well everyone!

Jason