Have you ever felt like the speed of change in our world is increasing? This trend is largely fueled by technology building upon itself to advance.

This illustrates the principle of compounding – similar to any exponential function, it shows that technological innovations occur at a progressively faster pace (see Moore’s law).

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The technological singularity is defined as the moment when this ‘rate of change’ takes on a vertical trajectory, signifying that technological transformation becomes instantaneous, simultaneous, and boundless.

While this idea remains theoretical and is quite improbable, it presents a fascinating thought experiment regarding how swiftly the world is transforming.

Another way to look at this evolution is to assess the average lifespan of significant companies within the S&P 500 Index.

Here’s an insightful remark from a McKinsey article:

“A recent study by McKinsey found that the average lifespan of companies on the Standard & Poor’s 500 was 61 years in 1958. Today, it’s fewer than 18 years. McKinsey predicts that by 2027, 75% of the companies currently listed on the S&P 500 will have vanished.”

This trend is visualized below, effectively showcasing the decline in company lifespans:

Average company lifespan on the S&P 500 Index from 1965 to 2030, in years (rolling seven-year average)

Source: Statistica

However, within the US market system, where lobbying is prevalent, larger companies often enjoy advantages due to their substantial lobbying expenditures, which enable them to secure favorable regulations and laws. At the same time, passive investing trends tend to favor larger market cap firms, resulting in continued passive buying of their shares through index funds.

These two circumstances contradict the trend indicated by the graph, highlighting that the lifespans of major corporations are indeed shrinking.

So, what could be driving this change?

The sole explanation I can pinpoint is that the rate of technological change is accelerating, thereby raising the likelihood of substantial disruptions affecting older, larger, and typically slower blue-chip corporations.

Perspective

The four oldest companies in the S&P 500 include AT&T, ExxonMobil, Coca-Cola, and Procter & Gamble (notably, General Electric has exited the index!). Interestingly, these four stocks are not among the largest, with ExxonMobil occupying the largest position at only a 0.95% weighting.

It’s logical that there are inherent frictional costs associated with technological progress that prevent the rate of change from becoming vertical.

Furthermore, practical realities concerning company lifespans restrict the anticipated longevity of successful firms from degrading excessively, let alone turning negative.

But this surely makes you think?

While passive investing can be defended within this context (owning the market allows for participation in success amidst index fluctuations), there is also a legitimate concern in the traditional belief that holding onto a strong investment indefinitely is becoming riskier…

The swift pace of global change and the pressures it creates on businesses imply that as investors, we must pay closer attention to our investments more diligently and might need to reassess holding periods as exit strategies gain significance with the declining average lifespan of firms.

If indeed 75% of the companies currently listed on the S&P 500 are expected to fade away by 2027, I hope you’ve divested from them well ahead of that date.

Keith McLachlan is the Chief Investment Officer at Integral Asset Management.

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