Paranoid
Only the Paranoid Survive – Andy Grove
Most every weekday morning, I watch about 10 to 15 minutes of the start of CNBC’s Squawk Box before heading into the office. The lead story on Friday August 2nd was about Intel Corporation’s shocking 2nd quarter earnings (in this case loss) announcement after the market’s close on Thursday, August 1st. Intel’s share price fell 26.1% on Friday, August 2nd. As the summary below shows, the news was not good and well below expectations. Specifically, it announced that it was –
- Laying off more than 15% of its workforce
- Suspending its dividend
- Lowering full-year capital expenditures by over 20%
In addition, Intel’s second quarter earnings came in way below analyst expectations and revenue for the quarter was also below prior guidance. The point here is not to delve into what is ailing Intel. Rather, it is a reminder of how difficult it is for leading companies to maintain their long-term competitive advantage that is essential to providing favorable outcomes for shareholders.
While listening to CNBC, I thought of Intel’s longtime CEO Andy Grove who decades ago wrote his widely acclaimed book entitled Only the Paranoid Survive: How to Exploit the Crisis Points that Challenge Every Company and Career.i In it, he wrote eloquently about the inherent challenges that confront most, if not all, businesses over time. History shows that it is exceedingly hard for dominant companies, industries, and sectors of the economy to stay on top. By its very nature, capitalism is intensely competitive and throughout history, many companies lose their mojo to nimble, hungry and laser focused competitors. In profitable, rapidly growing segments, the table stakes are incredibly high, and competition makes it hard to stay on top. That said, it is also a daunting challenge to predict the inflection points not only among individual companies, but also the powerful market cycles wherein winners in one period become laggards in another and vice versa. History is full of cautionary lessons that many investors find hard to heed - particularly during periods of euphoria and despair.
As I have shared before, we believe long-term success is not so much dependent upon capturing all the upside of the best market segments in the best of times, but rather in surviving (emotionally and financially) in the inevitable but inherently hard to predict worst environments. This is particularly true for retirees who are relying upon distributions from their portfolios to meet their lifestyle needs. While it is inherently difficult to predict sea changes in economies and markets, let alone individual stocks, industries and market segments it is important to prepare for them. Furthermore, the subsequent duration and magnitude of change are inherently hard to forecast with any degree of precision. That is why we hold broad strategic allocations in all major stock market segments in the U.S. and internationally as well. Market history shows that former darlings often falter and never fully recover. We also know that with the benefit of hindsight, we will see stocks that ‘blow the doors off’ peers, other industries, market segments, etc. These same stocks can falter and never quite re-emerge the same, let alone bona-fide winners.
Changing gears
For the past 40 years or so, I have had a deep and growing passion for the capital markets. I am fascinated by the progress we collectively have made across time and borders that have led to higher living standards, greater aggregate well-being for more and more segments of the world’s population over time. Is there room for improvement? For sure. Many people and communities here and abroad are still struggling each and every day. That said, I am optimistic that at least in aggregate, that individuals, communities, companies, and industries in market-based economies will continue to innovate and create goods and services that have tangible value. In short, I believe it is highly likely that we will continue to experience significant progress over time.
Recently, I finished reading the latest book in Ken Follett’s Kingsbridge series. As you may know, the first in the series, Pillars of the Earth was published in 1989 and the fifth and most recent book, The Armor of Light was published last year. The time frame for this latest book spans the 1790s through the end of the Napoleonic Wars in Waterloo (now Belgium) in 1815. While the landed gentry had a generally privileged lifestyle, conditions for most people were hardscrabble. Due to incentives to innovate and create valuable goods and services, we have experienced a greatly improved standard of living, education and general well-being in recent centuries. Of course there have been notable, often decades-long setbacks along the way. Nevertheless, we have confidence that long-term progress lies ahead that will be accompanied by a long-term increase in value of public and private businesses, real estate and others stores of wealth over time.
In addition to our long-term constructive view, we believe we should all expect setbacks along the way. To varying degrees all asset classes experience periods of advances as well as declines along the way. That being the case, it makes sense to make assessments over time as to which assets might be relatively dearly priced as well as those that may offer considerable upside over a multi-year time frame. We leave speculation about the short- term to others – our focus is on the intermediate and long-term. Most importantly, we want to reiterate our conviction about the benefits of diversification. Simply stated and especially for those who are relying upon recurring distributions from their investment accounts, it is essential to adopt a long-term view to hold assets that will likely perform differently along the way. Intel is just a recent, noteworthy example that once formidable, market dominating companies can fail to execute and provide tangible results for even patient shareholders.ii
As you know, I have a tendency to go on and on, but I am about finished. Specifically, I wanted to share a few excerpts from a two-page client letter I wrote on June 29, 2001 (the eve of the 225th anniversary of the Declaration of Independence. The NASDAQ 100 and S&P 500 had fallen appreciably from their respective all-time March 2000 highs. While it was before the attacks on September 11th, 2001, it was nevertheless a time of investor concern and I wanted to provide some comfort. Since March 24, 2000, they were down 61% and 19.8%, respectively. I entitled that letter, The Spark that Still Lights the World and here are the excerpts –
In summary, bull and bear market phases are common over time. So are changes in leadership among the underlying segments that make up the aggregate U.S. and international equity markets. Because it is hard to predict inflection points, long-term investors are well-served to diversify the underlying components of their portfolios. Doing so can not only reduce potential for adverse timing risk (e.g., being over exposed to the worst performing segments and under exposed to those that perform best), investors can more confidently, but not clairvoyantly, approach the unknown future.
Richard Jones, CFA
Partner, Harmony Wealth Partners
i Here are some excerpts from Only the Paranoid Survive (published in 1996) that remain highly relevant for corporate executives and business owners, as well as investors that remain highly relevant today –
“The lesson is, we all need to expose ourselves to the winds of change.” “Business success contains the seeds of its own destruction.”
“Complacency often afflicts precisely those who have been the most successful.”
“The ability to recognize that the winds have shifted and to take appropriate action before you wreck your boat is crucial to the future of an enterprise.”
“Altogether too often, people substitute opinions for facts and emotions for analysis.”
ii 
Source: FactSet for both charts above.
The charts above both pertain to Intel. The top one shows INTC’s performance for the 20 years ended August 2, 2024. The bottom shows the cumulative price change for Intel and the NASDAQ 100 index. The former is down 11.9% while the NASDAQ 100 is up 1216.8% over the past 20 years. The next 5 or 10 years may well be different for both. Lastly, it is worth noting that Intel’s share price continued to rise for months after the March 2000 highs for the NASDAQ and S&P 500. It’s all-time closing high was $74.88 on August 31, 2000. At just under $20 today, it is down 73% from that price.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Harmony Wealth Partners is not a registered broker/dealer and is independent of Raymond James Financial Services.
The NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index.. It is based on exchange, and it is not an index of U.S.-based companies. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Any opinions are those of Richard Jones and not necessarily those of Raymond James.
