For a few years now, it has been fashionable to say that we are living through a pace of accelerating technological change which shortens the lifespan of companies. Commentators who say these sorts of things (eg. management consultants, brokers & bankers) also enjoy noting that most investors are now traders i.e. people who seem to buying and selling stocks faster than you and I can finish reading a typical editions of 3 Longs & 3 Shorts. In this outstanding newsletter James Bullock of Lindsell Train, a London based investment house admired by the team at Marcellus, says whilst the above line of thought might be true, it is by and large irrelevant to their long term ‘buy & hold’ forever style of investing. Their explanation for why this is so is fascinating.
They begin by noting that they sell one stock every three years: “In the 11 years since the Fund’s launch, excluding takeovers we have made just four complete sales Far from splitting seconds, our since inception turnover averages at under 4 per annum, giving an implied holding period of over 25 years.”
Then they highlighting something which is even more interesting: “…our Global Equity strategy more than half of our holdings are over 100 years old Next year Disney will join this list, taking us to 16 centenarians out of 24 holdings Our oldest is the London Stock Exchange ( which with roots going back to the 17th century is now over 300 years old as a business These companies are all atypical survivors They were already around in the gilded age of the railroad tycoons and yet still thrive through today’s digital revolution They sit at the heart of our portfolios, supporting the thesis that old needn’t mean decrepit or dilapidated that these vintage companies still have plenty of life in them.”
They highlight that these very old companies are continuing to compound at a rapid rate inspite of all the chatter about disruption. Amongst the examples given in the newsletter is London Stock Exchange: “The LSE is a particularly good example of that, being our eldest, but also top performing holding We’ve owned it in our Global Equity Strategy since its 2011 launch and have so far enjoyed more than a 12 fold total return from the shares, comfortably outpacing even the Nasdaq Composite’s otherwise impressive six fold GBP return And yet unlike the constituents of the tech heavy index (which have an average listed age of less than 20 years), the LSE was already 313 years old when we started the clock.”
James Bullock then cites Buffett to explain why some companies get better with age and thus do well across centuries: “…the answer lies in a deeper understanding of ‘economic moats‘. Introduced by Buffett, the term reflects the tenacity of a business model and its barriers to competitive entry Moats ultimately determine the durability of excess returns and are highly coveted. However, whilst many companies claim shelter from some form of moat, they are not all created equally In our experience, most are built into unstable foundations (technology being a particularly precarious competitive advantage) and ultimately prove transitory. Mean reversion is revered for a reason. Higher turnover strategies perhaps navigate this fade by trading around it, but as long term investors we need something more durable. Moats that last not just years, but decades.
To return to the example of the LSE, the business evidently has a moat. One that’s guaranteed its long survival and helped to protect its remarkably profitable operation It is a very old marketplace, but the essence of the approach, that of attracting traders to a dominant venue, has proven extremely robust. Customers come because it alone offers them the liquidity, they both require and create, and the resultant network effects buttress the moat.
Importantly, the dynamics that support this, strengthen with time Liquidity leads to engagement and hence more liquidity The moat deepens with age and with use and becomes self reinforcing. This is a core principle, that in our experience, the deepest moats, the most durable over long time spans, are those with self sustaining qualities that improve with age. Those without form unstable equilibria, are fragile to permutation and ultimately succumb to entropy.”
James Bullock then does number crunching to come up with a maths model that explains why a small number of companies survive and thrive for several centuries. The results of his number crunching are as counter-intuitive as it is relevant for Marcellus’ clients – the companies that survive the longest are the ones that are most likely to do well going forward (most people, incorrectly it would appear, assume the opposite). Citing Taleb, Bullock writes: “…popularised by Nassim Taleb, this is the observation that the longer something has endured, the longer it is likely to go on enduring. That the act of survival, itself is a demonstration of survivability.”
James Bullock
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