The Triumph of Experience over Hope

 [ This article was written on 19th January - Posting for record ]

Lyndsell Train is value focus asset manager which focuses on protecting the real value of client’s capital for long period of time. They believe “Survivability” is the key criteria for any Investment Practice.¹

In its latest newsletter “The Triumph of Experience Over Hope “² portfolio manager James Bullock builds a case for very low churn equity portfolio having companies which has survived more than 100 years.

Here are few highlights of his portfolio:

·       Portfolio consists of 24 stocks.

·       Out of 24 companies in portfolio 16 companies are in existence more than 100 years.

·       Fund has sold only 4 companies since last 11 years.

In an insightful article James Bullock, Portfolio Manager- Lyndsell Train addresses most important question before Investor: Is there any advantage to be gained investing in a company which has survived over long period of time?

While on the first look it seems that there is no advantage in holding companies survived long period of time. Important work which has been quoted in article.

1.       Average listed lifespan of US companies is 15-20 years down from 30 years in 1970 – Richard Foster and Sarah Kaplan – McKinsey

2.       Between 1950 to 2009 out of 28,853 companies 80% of companies vanished – Santa Fe Institute.

3.       Important piece of work by T. Rowe Price Jr. arguing that corporation have a life cycle like those of Human.

4.       1994 study by David Barron, Elizabeth West and Michel Hanan provided some support to this idea noting higher failure rates in older businesses.

Now if one assumes organizational lifecycle equivalent to same as human than “Mortality rate decreases with the age of business.

Countering the logic of “liability of old age and obsolescence” some organizational ecologists have come up with argument that even young companies have serious business risk termed as “Liability of newness” (e.g. Limited access to capital, brand recognition, scale etc). And hence “Mortality rate is same for young and old company” This proposition was tested by Alex Coad in 2010 and he found disappearance rate is consistent with this logic for companies between 1976 – 2010. Same was re-affirmed by Daepp that most businesses irrespective of age has equal chance of failing.

But even equal chance of survival doesn’t justify portfolio manager having London Stock Exchange in his portfolio which is 300+ year old or Pepsi which is 129-year-old. There must be some strong foundation for this companies to remain Investible. 

Broadening the framework bullock introduced concept of “Lindy Effect”, first articulated by Benoit Mandelbrot and popularized by Nassim Taleb. In a simple word Lindy effect is “Longer something has endured, the longer it is likely to endure”. The act of survival, itself is demonstration of survivability”.

Quoting Taleb “Every year that passes without extinction doubles the additional life expectancy. This is an indicator of some robustness.” In 2017 mathematician Iddo Eliazar published full working showing Lindy effect’s formal analogy to power law (Parreto Principle of 80-20).

Which means as far as corporate life is concerned instead of increasing or constant mortality rate framework has to be adjusted to decreasing mortality rate. This makes it plausible for an organization to survive more than 100 year although it is rare occurrence but it is possible.

Pepsi at 129 year of age can still look young company if it successfully continues to create deep moat. If we listen to Indira Nooyi talking about Design Thinking and Milan Design Festival, we don’t get impression of tired old company. (https://www.youtube.com/watch?v=xl32J4TCS0E )

Question to be aske as an investor is to which type of industry or company shows Lindy compatible properties. Always important to remember if one find such business hold it tight and never sell it because if it is truly lindy-power law compatible “Outlier will not fall in line”

Question is why market still ignore such companies. Answer is very obvious market assumes all companies’ average life of 10 -15 years to arrive at intrinsic value of business by DCF method. In other words, there is mispricing available for anyone wanting to invest in company which has survived long and believe likelihood of it will survive.

It will be interesting to find Lindy-power law compatible companies in India. We do have seen that strong consumer franchises which has exhibited Lindy like characteristics in 50-70 years journey.  

I am attaching news letter, which makes an excellent read Hope you will Enjoy.

 

 

1.    One can get more information on Lyndsell Train on https://www.lindselltrain.com/team/.

2.       https://www.lindselltrain.com/application/files/3516/6981/1044/The_Triumph_of_Experience_Over_Hope_-_November_2022.pdf