Creative Destruction

Creative Destruction: A Relic By My Driveway

A while back, I was taking the trash out when something caught my eye—a plastic-wrapped, yellowish object sitting at the end of my driveway. Curious, I picked it up. It was a book filled with names and phone numbers. I believe people used to call this a phone book.

I think I would have been less surprised to find an old VHS tape or a CD-ROM encyclopedia lying there. I half-expected it to have discount coupons for fax machines and pagers tucked inside. Was someone playing a joke on me?

R.I.P. Paper Phone Book

Once a household staple, the paper phone book has joined the ranks of floppy disks, cable TV guides, and BlackBerry phones—relics of the past. All of these products were casualties of what economists call creative destruction (not sure what it says about me, but I love that term!).

• Creative destruction is the process of new and better technologies replacing old ones. In other words: Out with the old, in with the new! For example:

• Smartphones didn’t just replace landlines; they replaced alarm clocks, calculators, digital cameras, and even physical maps.

• Netflix and streaming services replaced DVDs, which had already replaced VHS tapes.

• Electric cars are rapidly replacing gas-powered vehicles.

• Next up…Ai! Ai is reshaping everything from customer service to content creation, just as automation once replaced factory jobs.

Creative destruction can be a scary thing as an investor if you believe that you need to figure out which technologies, companies and industries will be tomorrow’s winners and losers. But history shows that trying to outguess these shifts is a loser’s game. A quick look at the track record of active stock pickers will dispel any illusions you might have that you, or anybody else, can consistently do this.

Making Destruction Your Friend
The good news is, buying a market-based portfolio like the S&P 500 allows you to benefit from creative destruction without having to figure out who its next victims will be. The market, over time, will sort out the winners and losers for you. The failing companies will shrink and eventually leave the index and the rising companies will be added to (and become a larger share of) the index over time.

For example, looking back over the last 60 years, over 1,000 companies were added to, and subtracted from, the S&P 500 Index. If you had been invested in the S&P 500 over that time period, those changes would have happened with no investment research required on your part.  Creative destruction did the work for you. In spite of all the ups and downs over that time, $1,000 invested in the S&P 500 Index on January 1, 1959, was worth around $719,900 on December 31, 2024 (including reinvested dividends).

It makes you wonder why so many people feel the need to try to outsmart or “beat” the market by deciding which companies will be in favor and which will fall out of favor. It seems to me that rather than trying to beat the market, a better goal is to just be the market. Be the market by buying a highly diversified, market-based fund and letting creative destruction do its work.