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Creative Destruction

Sigma Investment Counselors

October 2, 2020

Creative destruction can be described as the dismantling of long-standing practices in order to make way for innovation.  The process is sometimes referred to as disruptive and inevitably results in winners and losers. Consider the emergence of Lyft, Uber and similar companies and their impact on more traditional taxi and car service enterprises.

The path to creative destruction is rarely smooth and now, investors should consider that broadly based stimulus programs could serve to extend the life of businesses in the throes of creative destruction.  The size and breadth of government stimulus funds may serve to postpone the inevitable for some businesses. For example, the outlook for high-rise office space is murky at best as it is not possible to accurately predict the long term permanence of remote work.  On the other hand, it is highly likely that post Covid-19, the world’s airline industry could quite quickly reach new record levels as leisure travelers seek to make up for lost time, although a full recovery in business travel is far less certain.

The nation’s responses, government and individual, to both the health and financial challenges presented by Covid-19, have clearly benefited bigger companies and made life more difficult for small business.  Think Amazon, Kroger, Home Depot, Netflix, Darden and so on.

All of this makes picking winners and identifying potential losers more difficult than usual.  A well-developed portfolio based on long term diversification may prove, over time, to be a successful strategy.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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