More than 40% of all public companies go on to lose effectively all their value,” writes Morgan Housel in a recent article for the Collaborative Fund.
Housel uses the example of Sears, a dominant player in retail in the early 80’s that even expanded confidently into the banking business. “Its catalog was the Amazon of its day,” he writes, adding, “Then everything fell apart.”
Housel outlines the following factors that can destroy competitive edge:
- Knowing you have a competitive edge “reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy.”
- “Nothing to lose is a wonderful thing to have,” says Housel, but once a company has financial success, “having a quarterly dividend to maintain” can get in the way of business-building strategy.
- “Mistaking a temporary trend for a competitive advantage:” Luck, says Housel, can be mistaken for skill.
- “Designing a device or discovering an investment strategy is a million miles separated from managing 500 or 1,000 people.”
- The loss of “paranoia” which, Housel argues, “is a trait newcomers use to combat how deeply the odds are stacked against them.” House argues that “once you reach a goal you tend to stop doing the thing that made achieving the goal possible.”
- “Reputational momentum is vicious and unforgiving on the way down.”
- “Brands are hard to build and even harder to span across generations.” Housel argues that, even if a company does everything right, trends can change, and new generations might not want to be associated with products their parents swore by.