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Today, I'd like to write to you about longevity.
Not so much about our own investment strategies — although a long-term investing timeframe is, of course, the preferred route to individual investing success.
Rather, what I wish to discuss is the actual lifespan of the businesses we invest in and whether or not they have the qualities to last for many years, decades, or even centuries.
As an investor myself — I'm now into my 31st year — I've always wondered what it would take to find a company that would suit my preferred investing timeframe of 'forever'; a period that is well beyond my own lifetime.
This leads me to ask the question: what are the core features of a business that lend it longevity?
The follow up to that question is, do we have any of these companies on the Australian Securities Exchange (ASX)?
(It's important to note here the distinction between a business and a company, which are terms used interchangeably. A business is a commercial activity — such as selling furniture — but a company is a structure which houses that business. Whilst the term 'company' is being used below, my focus will be on the business.)
It's interesting to read many of the various articles that appear online that recommend certain companies to hold for extended periods.
A good example of this is from James Gruber in March and April this year who wrote two articles titled '16 ASX stocks to buy and hold forever' and '20 US stocks to buy and hold forever'. In this article on ASX stocks he writes:
" [Investing is …] not an easy task. First, you must be confident that a company can last for a long time. After all, the average company in the S&P 500 has a lifespan of close to 20 years, and for the ASX, it's unlikely to be much different. It rules out a lot of companies. For instance, ones that rely on a single drug for their success, those which have mines with finite lives, and stocks that are so big already that it makes growth difficult …"
This statement has been backed up by author and podcaster Bogumil Baranowski who writes in his book "Crisis Investing":
"As investors, we look for long-lasting, growing streams of cash flows generated by businesses that can grow and be profitable for as long as possible. The number of companies and industries that remain somewhat immune to change is getting smaller, while the rest of the businesses are constantly fighting to stay relevant as technological change accelerates creative destruction. This leads to an ever-shorter life of a major corporation as leaders of the business world. Their tenure among the largest 500 companies is shrinking quickly from 20 years in the early 1990s to soon way under ten years (emphasis added)".
As Baranowski concludes, the above may well have negative implications for the 'buy and hold' investment philosophy we hold dear (which we can also refer to as 'buy to hold').
However, I'm not as pessimistic.
I do believe there are businesses we can invest in for many decades, despite expected variations in underlying performance.
It's important for me to emphasise here the word 'believe'.
I have no special insights as to which company can be around in 100 years, other than what I can learn from current and previous company annual reports. Hence, it's an opinion of mine that individual companies we invest in today can be around many decades into the future.
The only caveat here is that the form of particular businesses can change. They can be in a private company today, to then be listed on a public exchange. After some years, they could then be acquired or merged, or to be broken up and sold.
Just consider National Australia Bank (ASX: NAB). Its history goes back to as far as 1857 when it was established as the National Bank of Australasia. It then grew via a number of acquisitions throughout the 20th century, including the merger with the Commercial Banking Company of Sydney in 1982, which led to the modern-day National Australia Bank.
If you can accept the premise that the ownership structure of the business can change — and assuming you accept there are indeed businesses that have the hallmarks of longevity — what do we need to look for to beat the pessimistic expectations that the lifespan of the typical company is shrinking?
Fortunately, there's been some academic research on this. In her book, "Lessons from Century Club Companies: Managing for Long-Term Success", Vicki Tenhaken summarises ten years of study to find the unique characteristics of businesses that have survived for more than a century, particularly those from Japan. It's in Japan where several of the oldest continuously-operating companies in the world are known to exist.
Tenhaken's research has found the existence of five key factors within these businesses:
- A strong corporate mission and culture
- Has unique core strengths and change management
- Has close relationships with business partners
- The presence of long-term employee relationships, and
- Are active members of the local community
Let's go through these one by one.
Mission statements emphasise what makes a particular business unique for its customers, suppliers and other business partners. Naturally, the business needs to be true to these mission statements and actually 'live' them. Values and culture are derived from this and are used to filter out those employees, customers and suppliers who are 'in' and those who aren't.
What about a business' unique core strengths and change management capability? There needs to be something that makes it stand out and, hence, provides it with a competitive advantage. It's 'DNA' perhaps? Whether it's building faster distribution capabilities, a better ceiling fan, or a cheaper way of doing business, these unique core strengths and expertise need to be fostered and passed on to the next generation within the business. If it can do this, businesses can ensure their competitive strengths are enhanced, allowing it to change with the times.
As Tenhaken writes:
'Century Club companies are not dinosaurs. They would not have survived world wars, economic depressions, globalisation, changing social and cultural mores, and quantum leaps in technology that created whole new industries (and obsoleted others) without innovation and change.'
Next up is the existence of close relationships with Business Partners.
A business can be only as good as its suppliers, distributors, customers and, indeed, the communities it serves. This is because businesses that understand they exist because of their partners will see the value of nurturing connections, especially when there's change. When there's loyalty, it's easier to survive disruption to the industry or when the business environment becomes a little rocky at certain times in the economic cycle.
Long-term employee relationships mean loyalty to the business' cause and the containment of know-how or "institutional memory" that can help the business overcome business challenges when they inevitably rear their head. Not only that, there's also the potential for some significant cost savings in not having to find and train new employees as the existing ones leave. If turnover can be minimised, the long-term benefits can be huge. The best companies will go out of their way to keep employees on the payroll, even when there isn't enough work to do, in preparation for the next upswing in demand. In my view, it's important to take note of any 'Best Companies To Work For' lists you see when researching what company to invest in next.
Finally, each business must be an active member of the community.
This could be construed as the 'S' in ESG investing (Environmental, Social and Governance). Older companies — or younger companies hoping to become old — tend to " … actively participate in their local communities, promoting them and developing local networks for mutual learning and benefit". Being socially responsible, then not only helps the community in which it works, which in turn helps the business survive, but it also can develop a strong sense of loyalty to that particular business.
One point that was only touched on lightly in Tenhaken's book was the general opposition to debt.
In a recent blog post, Morgan Housel supports Tenhaken's observation that some Japanese companies do indeed exist for a very long time. There are 140 Japanese companies that are at least 500 years old, with a few that claim to have been in existence for more than 1,000 years. The core reason, according to Housel, is that 'they hold tons of cash, and no debt'.
Additionally, whilst profit is important, the maximisation of profits isn't the end goal.
Instead, it's to be profitable enough to ensure long-term survival so as to not be reliant on debt or outside investors.
In my view, it's okay to a point to have some debt (or the occasional capital raising) but these funding arrangements should be used rather sparingly if the business is to survive.
It makes sense, doesn't it?
If there's no (or minimal) debt, then each business can't be hurt by aggressive lenders looking to call-in their loans. As Housel writes, the more debt there is, then the range of economic and political circumstances it can endure shrinks.
Which is why I think 'a clean balance sheet' is a useful addition to Tenhaken's list of attributes when looking for a business (or company) that can, perhaps, last for many decades or centuries into the future.
What Australian examples are there?
Let's cut to the chase. Are there any public companies on the ASX that could conceivably be considered as a future 'century club' member, after taking into account the six factors above? Each company will not necessarily have all of these attributes all of the time, but the existence of at least some has, in my mind, contributed meaningfully to their long-standing operations.
There are no guarantees here, but here are four ASX stocks that I think can still be around in 2124. An additional uncertainty is whether or not they will still exist in their current form.
Australian Agricultural Company (ASX: AAC)
AACo was established in 1824 (exactly 200 years ago) with the main business activity being cattle grazing and the production of beef. Whilst there are some product-substitute risks with this company, its scale of operations and ability to operate through changing climate over the last two centuries means it could have what it takes to be here in a century's time. The AA Trust owns just over 52% of the company.
Washington H. Soul Pattinson (ASX: SOL)
The seeds of this company were planted in 1872 when Caleb Soul and his son, Washington Handley, opened a pharmacy store in Pitt Street, Sydney. Rival Lewy Pattinson bought Soul's business in 1902 before listing the company on the Sydney Stock Exchange in 1903. Since then, there have been four generations of the Millner family involved in running or Chairing the company, with Rob Millner being the latest. His son, Tom Millner, is likely to be appointed Chairman one day, continuing the family's legacy of long-term investment and business building. The Millner family's stake in Soul Patts is reportedly worth more than $1 billion.
Brickworks (ASX: BKW)
Listed in 1961, it has a cross ownership with Soul Patts, which makes it difficult for any acquisitions of both companies. There's also a large Millner-family influence here, with Rob Millner also as Chairman.
Reece (ASX: REH)
The company began operations in 1920 when its founder, H.J. Reece sold hardware supplies from the back of his truck. Soon after that, the first store was opened and continued growing through to 1969 when it became a listed company. Its business partners help it to extend its own network in plumbing, bathroom supplies, civil works, irrigation and heating.
With a continuation of high inside ownership by the Wilson family, Reece is another company with the prospects of being around for another 100 years.
Foolish takeaway
In choosing four companies which could conceivably still be around into the 22nd century, there's a great deal of uncertainty here.
Hence, this is more of a thought experiment than anything scientific given how difficult (impossible) it is to predict the future.
With that said, it pays to think long term with our investing and, if we can find businesses that potentially come with a "longevity-gene", then this might help us make up our own mind in deciding whether to invest in these businesses, or not.
