Family business connoisseurs are all too familiar with the concept of longevity in the corporate world. Arguably, the central idea of a family business is a company that has at least transitioned and survived to the second generation of family ownership.
But much of the corporate world has little appreciation of longevity, particularly given the life-cycle of an average business has shrunk to between 12 to 15 years. These days everything is about the fast pace of venture and tech. Longevity seems boring.
But a recent blog post by US portfolio manager Chris Mayer thinks investors should build longevity into their portfolios and buy stocks in businesses that are about surviving and thriving much longer than the average business.
Mayer has more than a passing interest in the phenomenon of corporate longevity and family businesses. After all, he runs an investment business called Woodlock House Family Capital (nothing to do with this Family Capital). He set the company up with the financial commentator and author, Bill Bonner, after running his family office.
He is also big on giving investors tips to achieve stellar returns. In his book, 100-Baggers Meyer talks about 100 companies that have returned $100 for every $1 invested, or an investment of $10,000 turning into $1 million.
Apparently, says Mayer, there are only around 1,000 companies that have survived more than 100 years in the US. That is less than half a percent of all the businesses in the US.
Mayer looks at why these 100-year businesses have persisted and why they might make a good long-term investment bet – and deliver bagger-like returns. He quotes from Lessons from Century Club Companies by Vicki TenHaken.
After many years studying 100-plus year-old businesses, the US academic reckons companies that survive this amount of time and more have five central characteristics. Those familiar with family businesses will know these characteristics well.
Strong corporate mission and culture
As TenHaken says these businesses: “talk about their purpose all the time.”
Unique core strengths and change management
“Century club companies are not dinosaurs,” says TenHaken. Contrary to popular belief, these companies are very good at innovating and changing. But doing this through a position of strength.
Close relationships with business partners
This is very much built on the importance of stakeholder values being important to the company’s success.
Long-term employee relationships
Again, an important part of the stakeholder concept – employees at all levels stick around longer at century-long businesses.
Active members of the local community
“Century club companies tend to be very rooted in where they are, visible in their community and willing to help out with various causes.” Again, a central tenet of good stakeholder values.
“I think these points are useful and give you something else to consider when you are looking at which stocks you want to take with you on the long journey up the mountain of multi-bagger returns,” says Meyer.
“Also, if you invert everything, you get an intuitive picture of what won’t last: companies having an ill-defined purpose with lots of financial leverage, low profits, lack of innovation, easy to copy products, short-term relationships with vendors and customers, lots of employee turnover and one that repeatedly turns the cold shoulder on its community.”