I like small companies. Unfortunately, they can fail.

 

The counter argument, which I've heard numerous times, is to buy stock in big companies because they can't fail. They have too much inertia. The competition can never catch up. The government won't let them fail.

 

Let's review some slices of legend: David versus Goliath, The Rise and Fall of the Roman Empire, AOL.

 

Big wins often. Many small competitors learn that lesson. Goliath, the Roman, AOL, were successful within their prime days. But life is change. Eventually, everything we know will pass on. In a few billion years, the planet will even be swallowed by the sun. At that point, saving the planet takes on a different meaning.

 

At a talk at the beginning of the year, someone asked me about buying General Motors. To him, buying the stock made sense because the government would prop up the company. It couldn't fail. He may eventually be right. My question back to him was about the company and its products. I like to buy stocks in companies that produce products that I might buy. To me, the company is the subject, not the stock.

 

Since the beginning of the year, General Motors stock is down 80%. Its market cap is below that of many of the small companies that I invest in.

 

We say that the mighty may fall, but the truth is that the mighty will fall. The weak will fall. Everything will fall because nothing is permanent. The residue is not infertile. The resulting detritus spawns evolution and revolution.

 

If you can't tell by now, I am not a fan of the buyouts and I am a fan of innovation.

 

Civilization continues because it constantly learns and rebuilds from the debris of failure.

 

This economic upheaval will produce revolution. Many established industries will find that their further evolution isn't sufficient to survive their shrinking environments. Many small companies look around, see an advantage, and will jump into the shifting landscape. Their chance of survival can improve when they recognize that the technology has matured, competition has changed, and that consumers are more willing to break out of tired patterns.

 

Change happens. David's country and Goliath's country have convoluted histories yet remain in some form. Rome became Italy, a fine place for vacations, wine, and fashion. AOL survives and is getting another chance to change.

 

General Motors may survive. It may thrive, but upheavals in large institutions take a long time, and it may not regain its prominence.

 

I am happier to be invested in small companies that are defining themselves. Redefinitions require a company to stop, figure out what is wrong, figure out what might be right, convince itself to change, and then change. While a behemoth takes that many steps, the smaller company is making progress. The first thing mega-corps have to learn, and sometimes the hardest thing they have to learn, is that they aren't too big to fail. In that regard, small companies have a head start. They've never known any other point of view, which is why I think they have a better chance to succeed.