Before the advent of cell phones, for a brief period we had pagers as a means of communication. They only allowed one-way communication. Anyone who had invested in stocks of companies that made pagers would likely have suffered losses due to the obsolescence of the technology.
In the example above, the technology has changed and this has made old technologies obsolete. In other words, obsolete.
There could also be a situation where a particular company is not keeping up with new trends. For example, in the automotive industry, the makers of the Ambassador and Premier Padmini cars (popularly known as Fiat) did not adapt to the new conditions and were therefore complacent. The Ambassador car was manufactured by Hindustan Motors Ltd. If I remember correctly, it was once a top notch certificate and part of the Sensex. Today, I doubt the company is on investors’ watch list.
Redefining business methods
There is also the example of watches manufactured by Titan Company Ltd. When introduced, HMT watches completely controlled the market. However, Titan has redefined the ways of doing business. Some time ago, a business news article announced that HMT Ltd. had stopped making watches.
The example of a manufacturer of metal tubes also comes to mind. All of us in our 40s and older remember that our toothpaste, medicine, etc. were once packaged in metal tubes until laminated tubes became an alternative. I don’t think there are toothpastes in metal tubes today. The companies that made these metal tubes have become obsolete and unless they adapt to new materials, they are likely out of business.
During the lockdown, cloud kitchens and food delivery businesses have taken off. Likewise, various online aggregators also won. Online shopping has given impetus to digital payments.
They say, “The only constant in life is change.” This also applies to products and industries.
As an investor, it is extremely important that you keep up to date with developments in the sector of the companies in which you have invested via shares. Even if your investment is in bonds/debentures of a company, it is important to keep an eye on that company and its industry trends. Because, if the company became obsolete for whatever reason, it would also struggle to honor its commitment to bond and debenture holders. A winning company today does not need to be winning tomorrow.
It is important that we do not become attached to our investments. It’s a cognitive bias. Our mind anchors itself in the original thought process and decisions made earlier. We then become emotionally attached to our decisions. This is one of the major biases of behavioral finance. Most of the time, we get carried away if our investment is in a company/industry that is the market leader or enjoys a very large market share. Indeed, due to its overall position in the market, it could generate supernatural growth. It can also be classified as a top-notch certificate. At this point, follow the basics of investing. Don’t be overexposed to a single certificate or a single industry. Always diversify across industries and businesses.
Many of my clients become emotionally attached to their investment. “Gaurav, I wouldn’t want to sell shares of [XYZ Ltd]. My father gave them to me and they are his blessings. Today I have immense wealth because of his blessing,” said one client.
As a professional, this is a situation I see quite frequently. At this point, I’m using my standard argument, “we’re not liquidating the investment, we’re just changing based on the current situation. This will ensure that your father’s blessings not only stay with you, but continue to grow.
Mutual funds, as investment vehicles, are better equipped to deal with this type of risk. While a prudent equity investor may be able to assess this risk, they may not be able to create a well-diversified portfolio due to the lesser availability of funds compared to an institution that has access to an amount important. Often, retail investors also become emotionally attached to a certificate, resulting in a sudden loss resulting from obsolescence. Emotional attachment, for example, to shares of Hindustan Motors because of the product they produced, could have led to financial problems for a retail investor.
(The author is a financial planner and author of Yogic Wealth)