Big things start out small.
Photo: Alanzon. Source: Wikimedia. CC-BY-SA 3.0.
That’s what I thought on a recent hike in the White Mountains. The forest was thick and dark. Up above the treetops, it was a bright, sunny day. Down on the forest floor the light had been filtered through several layers of overstory. But there was a funny thing about the forest floor: it was covered with seedlings, small sprouts that had germinated this season, reaching up into the faint light. “Good luck, little ones,” I thought. “You’ll need it.”
The chances that a sapling will grow to maturity, filling a spot in the forest canopy, are infinitesimal. They have to be just the right size when something catastrophic happens to one of the big trees – a storm that blows it over, disease or insects or something else to kill it where it stands. Only one – out of dozens at the right place at the right time – can grow into the opening, where it can generate seeds and seedlings and the cycle starts all over again.
It’s this way with investing. At times of stable growth and long cycles, the big firms seem to dominate. We saw this in the late ‘80s, the late ‘90s, and now, after long cyclical expansions. In the economic disruptions that followed, small competitors filled the niches left by oversized, lumbering giants, giants brought down by economic hurricanes without or rot from within – like Enron or WorldCom or Eastern Airlines. (It’s easy to forget about the trees that fall, isn’t it?)
Then there’s a race to fill the spots that the giants used to control. Sometimes, another big tree will extend its limbs out to capture the sunlight. But just as often, a smaller, more nimble competitor will rise up, taking advantage of new technology and new processes and new talent – the genetic variation that naturally occurs in fresh seedlings.
Photo: Fir0002. Source: Wikimedia.
Walking in the forest and investing in a developed economy can be deceiving. It all seems so stable, so constant. But the only thing constant is change.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”