Ten Years

Many of the Investment Masters focus on businesses with longevity and which are likely to be doing the same thing in ten years' time as they are doing today. Often these are simple and boring businesses that have some form of competitive advantage which makes it hard for other businesses to compete with them. What Warren Buffett would call a moat.  

"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of competitive advantage." Charlie Munger

“The durability and strength of the franchise is the most important thing in figuring out [whether it’s a good business]. If you think a business is going to be around in ten or twenty years from now, and if they’re going to be able to price advantageously, that’s going to be a good business.” Warren Buffett

“The value of a company is derived from what it produces for owners over its lifetime – usually many years, often decades. This supports a mindset calibrated towards longevity, forcing us to hone in on variables related to durability; barriers to entry, technological obsolescence risk, bargaining power, value being provided to customers, and threats of all kinds." Allan Mecham

It is getting harder to identify businesses with longevity given the increasing pace of disruption to business models. What once were bullet-proof businesses - such as cable TV, low cost retailers, fixed-line telcos, newspapers and strong brand-name consumer goods companies are now experiencing eroding moats. The emerging field of artificial intelligence is likely to further disrupt once stable businesses.

Consider the case of the branded consumer goods company. Ten years ago, the TV companies, newspapers and magazines had a monopoly over information distribution. Those businesses with the scale and cost efficiency to access these channels had a huge competitive advantage in creating awareness and demand for their products.

Munger expanded on the benefits of television advertising in his lecture on 'Wordly Wisdom as it relates to Investment Management and Business' in 1994:

"You can get advantages of scale from TV advertising. When TV advertising first arrived - when talking colour pictures first came into our living rooms - it was an unbelievably powerful thing. And in the early days we had three networks that had whatever it was - say ninety percent of the audience.

Well if you were Proctor & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of the network television because you were selling so damn many cans and bottles. Some little guy couldn't. And there was no way of buying it in part. Therefore, he couldn't use it. In effect, if you didn't have big volume, you couldn't use network TV advertising - which was the most effective technique.”

"So when TV came in, the branded companies that were already big got a huge tailwind."

Contrast that situation with today, where information and entertainment has been massively fragmented. Young people spend time watching home-made Youtube videos, Facebook, Snapchat and Instagram on their mobile phones. What was previously an impossibility - an individual or small company reach the masses - nowadays anyone can set up a website for almost no cost and/or attract followers to an Instagram page.

Consider the following recent comments by Snap's Chief Strategy Officer, Imran Khan:

“… Nielsen found that 45% of 18- to 34-year-olds in the U.S. are reached by Snapchat on any given day. This is nine times more than the average daily reach of the top 15 TV networks and nearly 5 times more than the top TV network. 87% of our U.S. daily active users between the ages of 18 and 34 cannot be reached by any top 15 TV network.” 

In one of the best notes I've read on disruption, Ben Thompson from Stratechery, explains how Dollar Shave Club disrupted Gillette with the help of Amazon.

"AWS and Amazon itself, having both normalized e-commerce amongst consumers and incentivized the creation of fulfilment networks, made the creation of standalone e-commerce companies more viable than ever before. This meant that Dollar Shave Club, hosted on AWS servers, could neutralize P&G’s distribution advantage: on the Internet, shelf space is unlimited. More than that, an e-commerce model meant that Dollar Shave Club could not only be cheaper but also better: having your blades shipped to you automatically was a big advantage over going to the store." Ben Thompson

I recently read a quote from Jeff Bezos of Amazon where he discusses change...

“I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.” Jeff Bezos

A business's value is derived from the free cash flow it earns over its lifetime. If its lifetime is uncertain it maybe impossible to reasonably estimate future cash flows to calculate a value so it can be purchased with a margin of safety. If a company's lifetime is shortened by deteriorating industry dynamics or technological disruption it's likely to lead to poor returns.

“Business value is rooted in long-term earnings.” Allan Mecham

“It’s no surprise that the best returning stocks over time have been in areas like consumer goods where change is relatively incremental.” Marathon Asset Management

“Making predictions about the future is also very difficult. Investing is the ability to predict the future. You really need to understand a company and its industry and assess their outlook for the next five or ten years. It isn’t easy. Before investing, we need to know at a minimum what a company will look like in ten years and how it will behave in a downturn. Otherwise, how can you judge that the value of this company won’t decline? To know what a company’s future cash flows are worth today, we must know approximately what those cash flows will be in ten or twenty years.” Li Lu

The Investment Masters try to invest in business which will look similar in ten or more years.  

“At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable. Even then, we will make plenty of mistakes.” Warren Buffett

“We look for simple businesses that we can understand and where we believe the companies ten years from now will be selling the same basic products and services they are today.” Francois Rochon

"We focus on very basic things. Is the business model understandable and is it likely to be essentially the same ten years from now?" Francisco Garcia Parmes

“I am not going to be able to figure what the moat is going to look like for Oracle, Lotus or Microsoft, ten years from now. Gates is the best businessman I have ever run into and they have a hell of a position, but I really don‘t know what that business is going to look like ten years from now. I certainly don‘t know what his competitors will look like ten years from now. I know what the chewing business will look like ten years from now. The Internet is not going to change how we chew gum and nothing much else is going to change how we chew gum.” Warren Buffett

“You’ve got to make sure that the business will be around for the longer-term. If you’re not sure how the business is going to look like five years out, you probably shouldn’t be investing. It doesn’t mean you own it for five years, but you’ve got to be careful because markets anticipate a turn in fundamentals a lot faster than we like to think.” Rajiv Jain

“When we are looking at these businesses before we decide to purchase one, we’re trying to figure out what this businesses is going to look like five years from now and ten years from now, not what’s going to happen in the next quarter or the next year. Our ability to focus on the long-term strategy and growth of the business allows us to eliminate a lot of the noise that’s in the marketplace that causes a lot of short-term stock price swings. This allows us to keep our turnover low and allows the companies’ earnings growth to do the investment compounding for us.” Daniel Davidowitz

“Of course, most companies will not survive for 30 years or more. Most companies fail. So just applying this filter -'will such and such a company likely be around in 30 years?' - savagely reduces the universe of potential investments for me. But every so often you come across a business with a brand or a franchise that has survived and thrived over many decades and where it doesn't seem totally absurd to expect it to continue to do so.” Nick Train

Most businesses with longevity require a culture of innovation.

"Severe change and exceptional returns usually don't mix. Most investors, of course, behave as if just the opposite were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today's business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be. Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns." Warren Buffett

"Not only individual firms, but also entire industries must be judged as to their ability to keep pace with the needs of the future. The investor has to be certain that neither the products of the company in which he invests nor the particular industry itself will become obsolete in a few years." J Paul Getty

Businesses change, but companies which sell essential items that are unlikely to undergo significant change have more durability than products with short life cycles.

“I define risk as the probability that a business trajectory will change dramatically for the worse. First of all, you choose your businesses carefully. By picking businesses that have very few competitors and that are basic, essential-type businesses, you mitigate the possibility of that happening. It tends to be a more boring business.” Glenn Greenberg

"A computer company can lose half its value overnight when a rival unveils a better product, but a chain of donut franchises in New England is not going to lose business when somebody opens a superior donut franchise in Ohio. It may take a decade for the competitor to arrive, and investors can see it coming." Peter Lynch

"I stick to businesses we understand and for which there is an ongoing need." Christopher Browne

"We share a passion to buy, build, and hold large businesses that satisfy basic needs and desires." Warren Buffett

“We’d like to believe any business is analysable, but when you have product cycles of only twelve months, as an investor you’re very reliant on the company hitting that window exactly right. If they don’t and somebody else does, you can buy low all you want, but you find out pretty quickly that you were buying a future income stream that was a mirage. We haven’t sworn off technology entirely, but we’ve essentially sworn off investing in short-product-cycle technology.” Larry Robbins

“I like businesses with long product cyclessay, cornflakes as opposed to cell phones – where there’s less risk of technological obsolescence.” Murray Stahl

It's important to understand the business, the need for which the business is solving and the qualitative characteristics of the business. How will technology influence the business? Will there always be demand for the product? Does the business have characteristics that make it hard for competitors to compete with - brand name, culture, scale, network effects, patents, regulation, switching costs etc?

"If you focus on near-term growth above all else, you miss the most important question you should be asking: will this business still be around a decade from now? Numbers alone won’t tell you the answer; instead you must think critically about the qualitative characteristics of your business.” Peter Thiel

While any business with a long term track record can be at risk from change, the longer the track record the more likely the business has been stress-tested by adverse conditions.

"In addition to the comfort provided by a long history of corporate survival and growth, performance during the most recent crisis may prove something of a touchstone for investors seeking security as well as income. Nowadays, one doesn't have to guess what happens when the wheels of capitalism briefly stop turning; one can check empirically. In reality, despite the stock market panic, many companies continued to see revenues and profits rise, or decline only modestly, during the breakdown of 2009; Coca-Cola grew organic sales by 5%, McDonalds by 4%, P&G by 2%. Even amongst the cyclicals, 3M's revenues fell by only 8% and margins were stable." Marathon Asset Management

It's one of the reasons many of the Investment Masters avoid turnarounds, tech companies and newly minted businesses.

How will the companies you own look in ten years?