Companies are like people. They need to be managed correctly, looked after and supported by their shareholders (family) if they want to thrive over the long term. And just like people, the lifespan of companies is also limited, although it is much harder to tell when a company will eventually collapse.
This is something that will haunt all long-term investors. We know the average life expectancy of companies is shrinking, and this is only making life harder for investors. Indeed, even Amazon AMZN, which is widely considered to be one of the most innovative and successful companies of the past few decades, knows that one day it will collapse under its own weight, a belief that led CEO Jeff Bezos to write in a memo to staff last year:
"Amazon is not too big to fail … In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespans tend to be 30-plus years, not hundred-plus years."
Bezos isn't the only highly successful business manager who has warned that his company won't be around forever. Charlie Munger (Trades, Portfolio), the right-hand man of Warren Buffett (Trades, Portfolio), has also spoken on this topic in the past.
Companies don't last forever
According to notes taken at a meeting for Wesco's shareholders back in 2011, an audience member asked Munger if he could list some of the entities that had similar qualities to Berkshire Hathaway BRK.A BRK.B in the past.
He replied that if you look back to 1911, only two of the top 10 companies at the time were still in business, General Electric GE and Standard Oil. After being broken up by regulators, Standard Oil isn't around in its previous form, but its flag is still being carried by the world's largest oil companies, Exxon Mobil XOM, Chevron CVX and BP BP. These businesses can all trace their histories back, in one way or another, to the Standard Oil empire.
Depending on what happens to General Electric over the next several years, it could even be the case that this stalwart of American industry eventually disappears. This simple example illustrates how difficult it is for companies to remain relevant over the long term.
In his talk, Munger said Standard Oil was able to succeed because it really did have everything going for it. Oil was just seeping out of the ground, and the company couldn't draw it out fast enough and sell it on. Very few other businesses have the same tailwinds working in their favor. The company also succeeded because it had talented engineers working for it who were able to extract the oil at a level of efficiency peers could not replicate. With such a stable and predictable business model, the company could afford to make mistakes and still grow.
Finding long-term businesses
The problem investors have is finding companies with similar qualities. Many companies might look successful today, but that does not mean they will still be successful 10 or 20 or 50 years from now. It requires a special kind of business, run by exceptional managers in a defensive industry to stand the test of time.
Can we be sure that Berkshire Hathaway will be around 50 years from now? Because of the way Buffett has built this business -- as a decentralized enterprise -- I think it stands a better chance than most to be a successful investment over the long term, though the company may look very different to the one we see today.
What's the solution to the problem of being able to pick long-term stocks successfully? It seems there isn't one. In his talk, Munger did not offer a solution, just an observation of how hard it is. The key, I think, is to remain ever vigilant, always be on the lookout for companies that are advancing or falling behind -- just as Buffett has at Berkshire Hathaway. It's not easy, but, then again, investing isn't supposed to be.
Disclosure: The author owns no stocks mentioned.
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