The Lindy effect, popularized by Nassim Taleb, offers an intriguing approach: invest in what has already proved itself. Under this theory, the life expectancy of something non-perishable - an object, an idea or a company - is proportional to its age. This is not a law of physics, of course, although the intuition is powerful. Older books, ideas or technologies still in use today have survived the ages, a sign of their robustness. In that sense, they offer a kind of reassurance that recent innovations cannot yet claim.
This points to two major investment philosophies: ‘value' investors, focused on the strength of fundamentals, and ‘growth' investors, oriented towards upside potential.
It is worth noting that 8 out of the 14 companies that represent at least 1% of Berkshire Hathaway's portfolio are more than 100 years old. Surprising, because it seems obvious that a group like Michelin cannot match the growth of the Magnificent Seven. And yet…
To review the methodology behind the "Lindy portfolio”:Lindy Effect in Investing - Market Sentiment
One useful point to raise is the discounted cash flow (DCF) method, widely used in the stockmarket to estimate a share's intrinsic value and compare it with its market price. It assumes the company will exist indefinitely, discounting cash flows into perpetuity using a growth rate. Yet that assumption is rarely questioned.
In reality, 50% of companies disappear before five years, and 80% before twenty years. This bias distorts the valuation of a large part of the market. Conversely, it is easier to value a mature company correctly - one that has proved its ability to survive.
So when market noise becomes deafening, or valuations seem disconnected from reality, looking at the Lindy effect can help investors stay invested with a more defensive portfolio. These older companies often have durable advantages, such as a strong brand like Coca-Cola, a huge network like Visa, or solid governance, without an obsession for technological disruption.
The Lindy effect is especially illuminating when you look at your holdings and find they are made up exclusively of companies that did not exist 20 years ago. Older names provide a real cushion - one that does not come at the expense of performance.
Some techno-optimists may cite Joseph Schumpeter or Philippe Aghion, the latest Nobel Prize winner in economics, both champions of the virtues of creative destruction. Indeed, they argue that innovation inevitably destroys established positions. However, that is precisely where the strength of older companies lies: in their ability to adapt.
The truth probably lies somewhere between these two approaches. It would be absurd to ignore a company simply because it is young. However, it would be just as misguided to underestimate the power of those that have already weathered many a storm.
