The average life of a company is shrinking. Today, the average age of an S&P 500 company is 15 years. That compares to 67 years in the 1920s. Yet, outliers exist that defy that trend.
One such group of outliers is known as the Henokiens. To be a Henokien, a company must be founded over 200 years ago and still controlled by the founding family. There are 48 member companies in the group.
What does it take for a company to survive over 200 years? Lessons from Century Club Companies answers that question. The author, Vicki TenHaken, studied companies over 100 years old to see what characteristics set them apart from all the rest.
Interestingly, her results carry some crossover lessons to investing. It starts with having a mission statement.
Live the Mission Statement
Long-term success is the byproduct of a company successfully working its mission. Every century-old company has a written mission statement that led the company to where it is today.
That mission is taught and repeated to every employee. It becomes so ingrained that it’s the guiding philosophy behind every decision.
The mission these companies live by is the epitome of process over results. In fact, the mission statements leave no mention of profits or growth rates or other metrics repeated in most quarterly reports. Yet, living that mission produced the results needed for the company to thrive for over a century.
Similarly, great investors follow an investment philosophy to guide their decisions. For example, the value investing philosophy of buying something for less than its worth has a proven track record. Great investors build their strategies around that simple philosophy.
In addition, basic principles exist in investing that are proven to benefit investors. Things like low fees, low transactions, and diversification are simple ideas that keep investors out of trouble and lead to better results.
Whatever investment philosophy or principles you choose, make sure it has a proven track record backed by data. You also have to believe in it, because if you don’t, you’ll ditch it the instant times get tough.
So put it in writing. Live it.
Conservative Approach
Businesses don’t last 100 years by taking excessive risks. Century-old companies are financially conservative. They tend to avoid debt and put profitability above growth.
Taking on excessive debt puts the company at risk of failure. Maintaining little to no debt takes that risk off the table and keeps costs low.
Profits, however, are the lifeblood of the company. It’s the result of following the mission.
Profits allow the company to self-fund growth. It also lets the company build a cash reserve during the good times, so they can survive through the eventual bad times. The cash pile also allows the company to seize opportunities quickly without taking on debt. These companies survived because profits help them stay financially sound.
Conservative investment strategies tend to get poo-pooed, especially during raging bull markets. But when chasing huge returns is all the rage, few investors realize that huge returns can be quickly followed by huge losses.
The advantage of a slow and steady approach to investing is that it chugs along at a reasonable pace. It may miss out on the high returns in bull markets, but, more importantly, it suffers much less in bear markets. Though, patience is key because it averages out to a solid return over a full market cycle.
In addition, building a cash reserve can’t be understated. Cash lets you survive the eventual tough times so you can avoid selling pieces of your portfolio at the worst possible moment.
Constant Improvement while Staying Flexible
Companies don’t last 100 years or more by being stubborn to change. They’re not stuck in the past. Century-old companies are built on knowledge and specialized skills passed down through generations but a willingness to learn, improve, and be better are defining characteristics.
What stands out is that century-old companies are never in a rush to jump on every new innovative trend. They’re patient. They innovate, research, and experiment. They just adapt at a slower pace than others.
Slow may sound negative, but a patient approach allows companies to be flexible while avoiding a lot of costly mistakes that “first-movers” make trying to get ahead of the competition.
Of course, being open to learning is half the battle to investing success. Part of it is being humble enough to know that you don’t know everything, that mistakes will be made, and learning is part of the investing process. But it’s also the fact that markets change and investors need to adapt to take advantage of what the market offers.
Some of the best investors are known for a specific strategy. For example, Peter Lynch has “growth at a reasonable price.” Warren Buffett has “wonderful companies at a fair price.” But they relied on other strategies too. In fact, both Lynch and Buffett (in his partnership years) constructed their portfolios to take advantage of strategies that performed differently in different parts of a market cycle.
The goal is to hold true to your investment philosophy but be able to learn, improve, and adapt it to the different opportunities the market offers.
Long-Term Survival
The biggest difference between century-old companies and your everyday company is that century-old companies put long-term survival above everything else.
Long ago, the founders of these companies realized that their company’s existence benefited society. It not only filled a need for its customers but it offered stable employment, revenue for its suppliers, and improved its community. So every effort was made to strengthen the bonds between customers, employees, suppliers, and the community. Failure, to them, meant all would suffer, so it was not an option. The characteristics discussed earlier improved their odds of survival.
The companies that typically die early tend to have a selfish view of who benefits from the company. That leads it to be short-sighted. They focus on things like maximizing growth that run counter to long-term survival. A “growth at any cost” mentality increases the risk that often leads to their demise.
Investing is no stranger to similar short-term thinking. Trying the earn the highest return in the shortest amount of time usually gets investors into trouble. When you focus on the short term it’s easy to forget that stocks represent businesses. And long term business success drives long-term investing success.
The only way to survive in the long run is to survive the short runs. So survival is about keeping the long term in mind while planning for adverse situations in advance. It’s about prioritizing risk over returns. Survival is about following the basic characteristics outlined above.
Last Call
- How Bear Markets Trick Gullible Investors – M. Hulbert
- Accosting Transactions – Verdad
- Decoding the Quality Factor – Behind the Balance Sheet
- 5 Super-Obvious Signs We Were in a Financial Bubble – NY Mag
- John Collison in conversation with Stanley Druckenmiller (video) – Sohn Conference
- Seth Klarman: Opportunities and Pitfalls for Investors in 2022 (video) – Harvard Business
- Playing the Win with Investing Guru Mohnish Pabrai (podcast) – Richer, Wiser, Happier
- The 2022 Behavioral Economics Guide – Behavioral Economics
- How Pixar Went From Experimental Studio to Commercial Juggernaut – The Ringer
- At 88, Poker Legend Doyle Brunson Is Still Bluffing. Or Is He? – Texas Monthly
