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We’re witnessing the end of an era. This week it was announced that, after nearly a century, Exxon Mobil would be dropped from the Dow Jones Industrial Average. It was added back in 1928 and was at one time the largest publicly traded company in the world. It will be replaced with software giant Salesforce.com, a change that is emblematic of how significantly the U.S. economy has evolved from its days as the world’s industrial powerhouse to one now dominated by technology and services. The news comes on the heels of a staggering -39% decline this year in Exxon’s stock price.

While there’s still a chance Exxon my someday rejoin the ranks of the Dow, the message to investors should be clear: even big, quasi-monopolistic companies fall from grace. Exxon is just the latest iconic company to be removed from the Dow. General Electric, once deemed the best managed company in the world, was removed in 2018. Philip Morris (Altria)—the best performing stock of the 20th century according to Professor Jeremy Siegel—was removed from the Dow in 2008.

Exxon’s plight isn’t unique. Many iconic, leading companies remain market leaders for many decades only to spectacularly stumble as the world shifts under their feet. For example, Lehman Brothers collapsed during the nadir of the Global Financial Crisis and Merrill Lynch collapsed into the arms of Bank of America. Others often enter bankruptcy to re-emerge later as leaner, more efficient enterprises. Sears—the Amazon.com of the 20th century—is one such example of an iconic company hoping to eventually re-emerge. Still others are acquired by larger companies. Netscape and Yahoo!, two of the most iconic companies of the early dot-com era, come to mind. A few go out of business entirely. Polaroid, which dominated the photography business for many decades, failed to adapt to evolving threat posed by digital photography and filed for bankruptcy in 2008; its assets were sold off in 2017.

This isn’t to say that all companies are destined for the trash heap of market history. But because capitalism is so dynamic, market leadership is often fleeting, even for companies with high degrees of monopoly power. Companies know this. To protect their market position, many often build what economists call “barriers to entry”; for example, they buyout threatening start-ups, hire lobbyists, or engage in other anti-competitive behavior. But even that is rarely enough to remain perpetually at the top. In the forest, all giants eventually fall.

The lesson for investors? Diversification matters. No matter how in love we may be with a specific company; no matter how compelling a company’s story or product; no matter how dominant a company’s market position, there is always the very real possibility—perhaps likelihood—that a company may someday see its fortunes significantly and spectacularly diminish. There is simply no substitute for well-diversified portfolio.

At Mercer Advisors, our teams of investment analysts, CPAs, and tax attorneys have a deep understanding of the tax challenges and investment risks associated with highly concentrated positions. We have the team, tools, techniques, and expertise to help you manage both.  To learn more, listen to our podcasts about managing highly concentrated positions.

 

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