Sexy businesses, ones with high growth, brag-worthy products are certainly exciting, but it's the other end that is attracting from an investment perspective, ones that seem to hum under people's lives, quietly operating and continue regardless of economic growth and consumer uptake.
Boring businesses go about their business without fanfare or splashy press coverage. Their employees aren’t “ninjas” or “rock stars”; instead, they are capable and loyal, putting in countless hours and delivering value, visible in the happy clients (renewal of contracts), and continually strong financials.
All businesses have a shelf life: Competitive advantages erode, economies cycle unexpectedly, and life happens. But there’s an interesting theory called the Lindy effect, which asserts that some things, like ideas or books, actually get more durable over time. The chances that Plato will still be read in a thousand years are higher than the chances that the latest management book will be. The same principle applies to certain companies. The longer they’ve been around and weathered storm after storm, the greater the likelihood is they’ll continue to operate.
For investors, the historical record of these factors is invaluable in assessing both the risk and the reward. There’s a reason why people like Warren Buffett spend so much time studying historic financials of companies in which they’re not even yet invested. While assessing a startup, investors must rely on plans, “gut,” and team members’ individual backgrounds; boring businesses, on the other hand, provide a fact-based, data-rich resource in their historic record. Can the company sustainably retain clients and produce a profit? Its record is in past P&L statements. What happens to the company when external market forces radically change? Just pick the time period to review the data.
While history doesn’t necessarily repeat itself, it sets a much firmer foundation for understanding future potential.
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