Businesses are dynamic and their future success is far from guaranteed. Companies that earn high returns on capital often face stiff competition that could bring their returns to more normal levels. Other times, businesses face total disruption from new innovation that threatens the company’s very existence.
Traditional bookstores’ fortunes changed virtually overnight with the arrival of Amazon in the 1990s. If you had owned stock in Barnes & Noble or Borders Group back then, you would have been wise to sell your shares in advance of the eventual deterioration in its business.