RIP General Electric

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jun 20, 2018, 1:45:13 PM

and tagged In the News

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General ElectricOne of the big pieces of news in the financial world today focuses on General Electric (GE). The iconic American conglomerate has been removed from the Dow Jones Industrial Average, and its stock will no longer be included when the index is calculated. It will be replaced by the drugstore chain Walgreens.

No surprise here?

In some respects, this is neither a surprise nor a big deal. GE has had enormous problems over the past couple of years, and the stock has dropped significantly. GE simply is not as big or successful as it has been; therefore, it is less representative of the broader economy and market than it was. It should be dropped.

On the other hand, this is GE! It has been part of the Dow for almost all of the Dow’s existence. It used to be the largest company of them all, by market cap, and for years was one of the most admired. For GE to fall this far means, if you think about it, that you can’t take the continued success of any company for granted.

A story of high flyers

That view, I think, is the correct way to look at this. It is not a valedictory for a once-great company but a lesson that no company is guaranteed success. Even the best will face tough times—and may not survive them. This story is not about GE per se but about all the other high flyers out there.

The FAANG (i.e., Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) companies come immediately to mind. Right now, they are the largest and most admired companies out there, just as GE was at its peak. Right now, they seem to own the world, just as GE did. Right now, their fall is almost unimaginable. How could any of them fail to grow forever?

Actually, that last point isn’t quite true. We have the example of GE in front of us. Plus, if we look back a generation to the dot-com boom and bust, we can see the last round of tech companies that could do no wrong. A couple of them are still here and, indeed, still changing the world. But most are gone and forgotten. Even the ones that have survived and flourished ran into very tough times along the way.

The bigger picture

The story of the fall of GE is bigger than that, as well. It highlights that it is not just companies that rise and fall; it is industries as well. GE rose on its industrial prowess. As industry faded, GE moved into other areas—but never really matched its initial mojo. Industries grow and decline just like any other economic entity. In 2006, for example, the financial sector was 22 percent of the S&P 500 market cap. Today, it is less than 15 percent. In 1999, tech was almost 30 percent; in 2002, it was less than 15 percent and has since moved back up to almost 21 percent. These are big swings, and they reflect real changes in the economy and the markets.

What does GE mean for us today?

For people who owned the stock, not much immediately. The damage has already been done. For the rest of us, it should mean that we need to keep an eye on our investments and make sure we understand them. GE moved from a world-beating company to something different. It took markets—and investors—quite a while to understand that.

Don’t be caught by surprise. Pay attention to what you own and what is really happening. That is what we do here at Commonwealth every day. If you do your own investing, it is what you need to do as well.

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