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Creative Destruction

Dennis Friedman  |  October 31, 2018

MY FIRST JOB was in 1963, at age 12, delivering newspapers for the Los Angeles Herald Examiner. There must have been at least five children from my neighborhood who were newspaper carriers. Today, you rarely see anyone delivering newspapers. The Herald Examiner went out of business in 1989.

My next job, as a teenager, was working at a machine shop that made tools for aerospace companies, such as McDonnell Douglas and Rockwell North American. The machine shop is long gone and so are many of the companies it served.

After I graduated from high school, I worked for an advertising company that made merchandise catalogs for department stores. Some of our customers were Buffums, May Company and Gottschalks. All three stores are no longer in business. Ditto for the advertising company that employed me.

When I was in college, I worked for Fedco, a regional membership department store in Southern California. It filed for bankruptcy in 1999, unable to compete with national chains such as Target and Walmart.

After college, my first job was at Hughes Aircraft Company. I worked in the Microwave Product Division that built microwave transmitters and receivers for cable television operators. The product line eventually closed down because of competition from Direct TV and new fiber optics technology.

Before I retired, I worked for a satellite company that was later sold to Boeing. It can take many years to build and launch a satellite because of the long lead times involved in the manufacturing process. As a result, by the time a satellite was launched, some of the technology was already obsolete.

Have you ever heard the phrase “creative destruction”? Joseph Schumpeter used the term in his 1942 book Capitalism, Socialism and Democracy, where he describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

The smart phone is an example of creative destruction: It destroyed the market for older cell phones, MP3 players, calculators, voice recorders, point-and-shoot cameras, personal digital assistants and wrist watches. Netflix disrupted the video rental business. It was instrumental in Blockbuster closing its 9,094 stores worldwide and filing for bankruptcy protection, proving that the “too big to fail” model doesn’t protect you from the process of creative destruction.

This relentless process explains why a significant part of my job history has been erased. The companies I was involved with, in my early life, were replaced by new companies that were more adept at producing the goods and services that society wants.

Sometimes, entire industries are turned upside down. The old coal industry is losing out to cleaner, cheaper and abundant natural gas created by the shale gas revolution. But that doesn’t mean that natural gas will be the long-term winner. Renewable wind and solar energy industries could eventually challenge natural gas.

Creative destruction also has an effect on workers. Old jobs are replaced by something new—and it isn’t necessarily new jobs: It could be new technology replacing an old job. Over the past 20 years, we have seen plenty of blue collar jobs in automotive manufacturing and customer service replaced by automation. We have already had a glimpse of the future with self-driving cars. Taxi and commercial truck drivers will inevitably be affected.

White collar jobs are also impacted. The work of pharmacists, attorneys and journalists is already being transformed by automation. Pharmacies and hospitals are using automated medication dispensing machines. Attorneys are using artificial intelligence to do document reviews. Media stories about business and politics are being written using computer algorithms.

Why is creative destruction important to an investor? It drives economic growth by creating new technology and production processes. That, in turn, results in the better products and services that are sought after by customers. This constant upheaval, with new businesses replacing old, creates a vibrant economy that should enrich investors.

Problem is, amid the gales of creative destruction, it’s hard to know which companies will survive and thrive. One indication: Among the almost 26,000 companies that have traded on the U.S. stock market over the past nine decades, just 36 were in existence for the entire period. Forget trying to guess which companies will be dominant in future. Instead, to reap the rewards of creative destruction, your best bet is own all companies—by investing in total market index funds.

Dennis Friedman retired at age 58 from Boeing Aerospace Company. He enjoys reading and writing about personal finance. His previous blogs include Taking InventoryA Word of Advice, Lucky One and Friendly Reminder.

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