Long-Lived InstosThe Acquirer's Multiple
During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Long-Lived Instos. Here’s an excerpt from the episode:
Q3 2020 hedge fund letters, conferences and more
Jake: All right, veggie time. So, this segment is called The Data of Long-lived Institutions, and it’s based on this article and a presentation that Alexander Rose gave, and he’s part of the Long Now Foundation. Those are the guys, I don’t know if you remember, but they built this 10,000-year clock. And maybe even longer than that. What’s interesting about it is, and I like this as setting the tone, but on all the dates that they put things on, they add a zero to the front of the year. So, they make it– it’s 02020 right now. You need to start thinking a little bit further out ahead.
Tobias: I love that. I’m going to create a clock that doesn’t move and say it’s a 10,000-year clock. It’ll tick over in 1000 years, or whatever, or 100 years.
Jake: Yeah, just hang around and wait for it. So, the first thing to talk about is, what they call this pace layers. They have this diagram. Imagine the layers of maybe the earth or something and you have like, as you move down, more and more layers. Out on the outer shell is fashion, and then next down is commerce, then infrastructure, governance, culture, and then finally, nature. And all those things, the things on the outer rim move much faster than the things on the inner rim.
So, they use the example of Apple, iPhones and whatever. Apple’s putting out a new iPhone every 12 months or whatever, the commerce layer is Apple’s selling methods. Let’s say it’s commercials where people dancing to a U2 song, they shadow people and that sort of changes at a slower pace than maybe the phone. And then, below that is infrastructure, which would be all the cell phone networks and the chip fabs, things like that.
Next layer down is governance, and that is often a government, but it doesn’t have to be the government. That’s things like privacy and standards and even how many cycles electricity wise when you plug the phone in, is it running, at 60 cycles? That change is slower. Then you get to culture, which nowadays, I guess you’d probably expect most people to have a cell phone if you met them, but 20 years ago, that wasn’t the case, I don’t think. I wouldn’t expect everyone to be carrying a cell phone.
And then, last thing is nature. They bring up some of the environmental damage that a lot of these electronics cause with rare earth– all the stuff. All the earth you have to move through to get some of these elements. Apple may at some point need to address that if they’re going to be that long lived. Anyway, it’s sort of interesting paradigm to think about these different layers and how quickly they change or not.
Next thing, 1950 the average company in the Fortune 500 was 61 years old at that point. Today, it’s 18 years old.
Tobias: That’s crazy!
Jake: I know. My question to you guys would be– All right, we’re seeing faster turnover now, but is that a secular or a cyclical thing? We’ve hit some IT or whatever, technology revolution, and that turned over the portfolio of the Fortune 500, or is it like, “Don’t expect the new guys to stick around for very long.” What do you think we are? Are we in a cyclical or secular there?
Tobias: Yeah, that’s an awesome question. I’ve thought about that a lot.
Jake: No answer?
Tobias: Yeah, I’ve got pretty good arguments for both sides. The secular one is, when you look back, they’re these– I don’t know how often but every 40 something years, there’s a big technological revolution. I’ve looked at it in the context of value and growth, but it’s still true that you have these big tech– maybe it’s not as many as 40, maybe it’s like 20 or something like that where you do have enormous turnover.
But then, if you look at the length of time that companies have– the age of them over time in the S&P 500, it’s been coming down. So, it looks like it’s a secular. I think sometimes it’s hard. This is something I think about a little bit too in relation to other things. But it’s hard to sometimes tease out the secular from a cyclical. When you’re at a cyclical peak, it looks secular, which is the problem. All of the statistics on a secular basis over a very long time period at a cyclical peak look secular. It’s why investing so hard.
Jake: Especially the first one of it. Let’s say cloud becomes more of a commodity and maybe it goes through cycles eventually. Well, this is the first– we’ve only seen one-half of that then potentially so far. And yet, it seems like, “Well, maybe that just keeps going up into the right forever.”
Tobias: It seems it’s getting easier to start businesses though, and it’s easy to get a business to scale on the internet because you can aggregate very niche audiences globally and get a fairly big audience pretty quickly, where there’s really no way of doing that even 30 years ago other than using more mainstream networks like television or something like that. You had to have the money to advertise on television. Now, you don’t. You could get a tweet picked up by somebody who’s got a lot of Twitter followers, and all of a sudden, there’s a lot of attention on your–
Jake: I mean, three bozos could just get on YouTube and talk for an hour every week.
Tobias: And there’ll be like 10 people or dozens of people watching.
Jake: Yeah, 10 people watching them.
Bill: An important 10 though. Very important 10.
Jake: That’s right. Bill, you have any thoughts on the secular versus cyclical?
Bill: Probably none worth sharing. I think I’m where Toby is on it. I think that– I mean, obviously Tesla is going to be around for a long, long time.
Bill: Rest, I don’t know. I just saw that they were included in the S&P, so they were up 12%. So, I figured I’d make that joke. I don’t know– yeah, I don’t know, sorry. My sense is that I’m more prone to like the moat and durability of businesses that require capital to replace them to those that are intangible, but I also realize that intangible scales a lot quicker and network effects are real, but– similar to when– I think I’ve said this before, but when I was in physics, I was always– it was much more intuitive to me when we were talking about things that I could touch in the physical world or how cars go around a racetrack. When we got into magnetic fields, it was always sort of harder for me to get my head around. I think it’s somewhat similar.
Jake: Hmm, yeah, that’s probably a good analogy I can torture there somewhere, eventually. All right, more data. Oh, go ahead.
Tobias: No, sorry. Keep going, I’ve got to think about– there was something germane to it, but I’ve got to think about where I heard it. So, keep going, sorry.
Japan’s Oldest Company
Jake: All right. So, they looked at a study of 5,500 companies that were over 200 years old, and 56% of them, so 3,100 of them, were in Japan, which is interesting. And then, another 15%, 800, were in Germany. And then, everything else is all over the place. Any ideas why Japan happens to be a place for old companies?
Tobias: Well, I was thinking about this other day. Doesn’t Japan have the oldest continuously operating– might even be family business, and it might be like 1000 years old? It’s either a restaurant or soy sauce manufacture or something like that?
Jake: I mean, probably. I’m not sure what the oldest one is.
Tobias: There’s a lot of pressure on you if you’re the child who has to inherit that business.
Tobias: You can’t do anything else.
Bill: You don’t want to be the one that messes it up. Yeah, that’s fair. Though you would think that over 1000 years and idiots run it, there must be something special about that business.
Jake: Statistically, yeah.
Bill: Especially within family. I know a fair amount of people wouldn’t trust their family members over a professional manager. I’m sure somebody in the family at some point is like, “Ah, this guy’s an idiot, but he’s the oldest. So, he’s got to take it over. This is BS. Our gravy train is going to stop.”
Tobias: The collective hive mind has come through with the answer. It’s a hotel that opened in 705.
Tobias: That’s it. [laughs] I wonder if they read–
Bill: [crosstalk] –the hotel.
Jake: We’ll get to that in a little bit. That’s a good segue. Another interesting finding of these 5500 companies, 90% of them have less than 300 employees. So, there’s something about size that creates problems, apparently, that lead to eventual dissolution. I don’t know if it’s a dilution of the culture, whether it’s– there’s Dunbar’s law, which I’m sure you guys are familiar with. It’s the 150-people units used militarily, like tribes tend to be in that size. And it has to do with they think that the human brain can only handle roughly 150 relationships and keep track of– the social load of keeping track of the relationships kind of tops out at 150. But this is 300, so why would it be– Why is it not– I would have believed more if it said it was under 150. I’m like, “Oh, well, that’s Dunbar’s law at play,” but it’s 300. I find that to be interesting. Although I did do a little bit more–
Bill: [crosstalk] –Fibonacci derivative or something?
Jake: Maybe. I did a little more research, and there’s anthropologists in the mid-19th century or 20th century, in New Guinea, which was a popular place to do anthropological research because they’re backward in time there relative to more advanced. They found that villages rarely exceeded 300 people because above 300, there would be schisms, a long inner clan within the tribe, and there’d just be a buildup of social tension to where it would break up eventually. So, that 150 number, maybe it’s more like 300, I don’t know, but it is interesting, why would smaller last longer.
Bill: I think you can adapt a little bit easier if you’re smaller. You get big, you get like an aircraft carrier, and then you can start taking on water from a lot of places. Banking is different, but it’s the only place that I’ve really worked that’s been that large, but everything was so process driven. I mean, it was so hard to get anything done. You wonder why can’t we get a term sheet out, but it’s got to go to credit, and then credits got to run up the chain if there’s something weird, and then it’s got to come back to your manager, and then you’ve got to change it in the system, and then it’s got to go back, and it’s like, what are we doing here?
Tobias: Risk management.
Bill: Yeah, and the answer is, the errors have a huge– I think that there’s merit to having your banks that regulated, but I do think that it makes them susceptible to be attacked. Conversely, I actually think that it gives them some defensibility because not just anyone can enter into that, unlike these FinTech companies, as long as they can exist on the edges and offload all that stuff to a partner bank that’s willing to do it, that’s one thing, but you FinTech people they think you want your FinTech to become a bank, you’re out of your minds. You never [crosstalk] it’s going to tear your face off.
Jake: You need those covers on your TPS reports always, that’s one problem.
Bill: But that’s what it is. If you’re big, and you get into that market, that stuff matters. I mean, it’s maybe not that crazy, but, yeah, you’ve got to make sure boxes are ticked and everybody’s got to go through it. Let the regulators in. You can look at what happens at Wells when the regulators get in. I mean, that’s a unique circumstance. But once they start scratching at something, it’s not like they just walk away.
Jake: Yeah. Another study of 1,000 companies that are over 300 years old, so a little bit older, smaller subset. 230 of them are in the alcohol business. So, what, sake, beer, or wine. 117 hotels, 88 restaurants, 67 food or sauce, 43 in pharma, 40 universities, and 8–
Jake: I know. 18 in the financial. That’s what you’re hinting at before, Toby, about Lindy effect. People probably need to eat, they probably want to drink some booze, and they probably want a roof over their head occasionally.
Tobias: You get a habit. If you like one brand of soy sauce, it doesn’t really matter. It’s not a huge part of your budget when you buy it. So, you’re going to buy the one that you like. It’s same with booze. If you like one particular brand, you keep on buying that brand.
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