NY City by Night. Photo: Paul Barcellos, Jr. Source: Wikimedia
Since 1900, US stocks have grown 6.4% per year, on average, after inflation. 2% of that has been capital gain, and over 4% has been dividends and reinvested dividends. A dollar invested in 1900 would have grown to be more than $1,400 today. By comparison, a dollar invested in the UK in 1900 would have only grown to about $500 today – a 5 1/2 % real return. And they’re better than the world average. This raises a question: how did the United States get to be so lucky? Among global markets, only South Africa and Australia have had better long-term real returns.
Source: Credit Suisse
One reason has to do with the way we deal with failure. The US has a very liberal bankruptcy regime. When companies can’t pay their debts, we allow them to stop paying their creditors and reorganize. Sometimes that means that the company continues, like General Growth Properties. That mall operator filed for bankruptcy in the middle of the recession of 2009, and came back out stronger than ever a year and a half later. By contrast, when Blockbuster Video went bankrupt in 2010, its assets were sold and the company was liquidated.
Former Blockbuster store in Nice, Florida. Public Domain. Source: Wikimedia
In both cases, managers were fired and unproductive assets were freed to be used more productively. This includes buildings and equipment, but it especially means people. When people are stuck working for “zombie companies” that have been propped up through subsidized loans, they can’t fulfill their fullest potential. Japan’s business sector is famous for having “company men” who draw a salary for doing nothing. What a waste of human capital! It’s like a generous version of debtor’s prison.
Failure isn’t really failure if we learn from it and put our time and efforts to more productive use. That’s why the startup culture in Silicon Valley rewards folks who are on their third or fourth attempt. In business, as in life, there’s no final defeat, just as there’s no final victory. Our bankruptcy laws and our market structure encourage people to keep trying, and toughen up.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”