I like old things -- old books, old buildings and old golf courses. Age gives them a depth of character and a certain quality that comes with having simply endured. I also like old businesses, too, but not for aesthetic reasons. I like them for the clue age can provide about the survivability of the business going forward.
You may recall the Lindy effect. It is a simple theory, which says how long an idea or technology may last correlates with how long it has already lasted. Old things, by virtue of being old, stand a better chance to get older still than newer things. (Taleb popularized a version of it. This Wiki article is a decent start if you want to read more on the Lindy effect and how it got its name. [Link])
A variation on the Lindy effect in business might go like this: a business that has applied a certain formula with success for many years is probably a good bet to keep doing it. Not a complicated idea, I know. But simple is often best.
Which brings me to what I’m calling the Swedish Compounders...
Swedish Compounders
I’ve been spending time reading and researching a basket of companies that seem broadly similar to me. They are all in Sweden. They are acquisitive. They are all involved in distribution or manufacturing. They all have some kind of family with a stake in the business. And, perhaps most interesting, they all crank out remarkably steady and attractive returns on capital, year after year after year...
They have names such as Lifco, Indutrade, Addtech and Lagercrantz. There are others, but these are four I’ve spent some time on. Here is a spread of a few basic return measures (from Sentieo) - return on assets, return on equity and return on capital employed:
And the stocks have all been winners. Take a look at the last ten years for each.
Addtech:
Lagercrantz:
Lifco:
Indutrade:
They are practically indistinguishable from each other. They are great performers. These kinds of steady returns are 100-bagger material given enough time. They are remarkable. And they are virtually unknown here.
In a conversation with a board member of one of the above companies, I commented on how these companies are unknown over here. And she said, “that's true even in Sweden.”
These Swedish Compounders often have deep roots. Let’s take Addtech:
“The history of Addtech as it is today started in the second half of the nineteenth century, in a world of coal smoke and horse-drawn vehicles. Railways were new and electric lighting was rare outside of city centres. It was long before world wars, refrigerators, automobiles, aircraft, the internet and mobile phones.”
This is from a pamphlet on the history of the firm. [Link.]
Addtech spun out of a company called Bergman & Beving, founded in 1906. The company claims the business concept that guided the founders, Arvid Bergman and Fritz Beving, is still as durable and applicable today. Addtech published a book c. 2000 called Idea & Soul (which I would love to read but have not put my hands on yet) about its way of doing things. The book became “an important cornerstone for corporate culture.”
They have some kind of special sauce, that hard-to-pin-down something we call corporate culture. All of these firms seem to have it. They’re decentralized and focused on returns. This is another one of the things I love about these firms. All of them have explicit financial goals and targets -- and they are metrics that make sense. All of them track and publish a profitability metric, such as return on capital employed, and have goals to keep it above certain levels.
Reading their annual reports, you get the sense these are shareholder-friendly companies, reliable vehicles to generate above average returns for a long time. I don’t own any of these (yet), but these are the kinds of businesses I want to own.
I think it is worth spending some time studying them and so I share them with you for your consideration.
Not Trendy
I know this idea of the Lindy effect goes contrary to everything people seem to want in markets these days. Everybody seems to want what is new and shiny and sexy. Companies that did not exist a decade ago carry huge market caps. Some of these deserve those hefty prices, of course. But not all.
The Lindy effect will work its magic on these cohorts as it has in the past. And looking back, we will see who is who, and what is what. But we can use the Lindy effect today, too, to give our portfolios a foundation. There is a lot to choose from.
In addition to the Swedish Compounders, there are plenty of other businesses that have been around a long time and just continue to pound out great returns. For example, consider Brown-Forman. I’m fascinated by the fact that Brown-Forman is 150 years old -- and still in the hands of the Brown family. Though I am a fan, I don’t own the stock.
I do own some old businesses. I own Texas Pacific Land Trust which dates to 1888, an offspring of the old Texas & Pacific Railway. It has been a big winner for two decades, thanks to the discovery of oil under its land.
Even older is AO Smith, which dates to 1874 and in which the Smith family still has a large stake. But today’s AO Smith doesn’t bear much resemblance to the original, which began as a manufacturer of baby carriages and bicycle parts. The stock is up over 4x in the last decade.
Even older still is Bollore Group, founded in 1822 and still in the hands of the Bollore family though not without an interruption. Today’s business, too, bears no resemblance to the original: a paper manufacturer on the banks of the Odet River.
This mix of history and family appeals to me. Tradition, you might say. A way of doing things that endures and creates long-lasting wealth.
Woodlock House Family Capital itself takes its name from an old family home in Portlaw, Ireland, that dates to 1864. The house itself has passed through many hands, but is now owned by the Bonner family (my seed investor and partner).
These examples pale in comparison to the world’s oldest businesses, which are over 1,000 years old. [Link] Most of the businesses that are over 200 years old are based in Japan. [Link]. Why certain businesses last so long is a fruitful question to explore, with answers you can apply today.
I’m not saying load up on old businesses. Some businesses have been around a long time but haven’t been good investments. That’s a different thing. But age itself may be a predictor of survivability, as the Lindy effect attests. That’s not nothing.
Thanks for reading!
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Published: February 3, 2021
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