The Lindy Effect

The value of a business is derived by taking future expected future cash flows and discounting those cash flows back to their value in today's dollars. 

As an investor, it’s important to have conviction that the business will continue to generate cash flows into the long-term. If you’re valuing a business on future cash flows, you want comfort that they will still exist when you own in it!

So how does an investor get comfort over future cash flows?

One simple heuristic is time - how long has the business been around and generating cash flow.

This is known as the Lindy Effect.

The Lindy Effect explained

The Lindy Effect is a theory that: the longer something has been around, the longer it will continue to be around.

Nasim Taleb popularized the Lindy Effect with regards to books, stating:

He also proposes that reading older books, which have stood the test of time, is better than newspapers filled with current events.  Many of which will no longer be relevant in a few days or months.

In this fast paced technological age, it is easy to assume disruption lies around every corner. Blockbuster and Kodak are famous examples of this, although considered exceptions to the rule.  Many things which have been around for a long time will continue to be around long into the future.

At Arbor Permanent Owners, we are big believers in the lindy effect. We consider this when looking at businesses to acquire.

Simple questions we ask ourselves are:

• How long has the business been around for?

• How long has it been profitable?

• How long has the industry/niche been around?

• How long have its customers and employees been around?

In this strategy, we don’t chase emerging industries or business models, or try to predict how industries/businesses are going to innovate or change away from the current state.

We look for tenure, retention, and maturity. Businesses with resilience and longevity. 

We optimise for things that stay stable over time because you can build a sustainable investing strategy around that.

Businesses which have shown resilience not only sell a relevant product. They have proven consistency to their customer base and aptitude in their operations. They have also endured through economic cycles.

The likelihood of them being around in 20 + years is amplified by the history they carry with them.

About Arbor Permanent Owners

Arbor Permanent Owners is a Serial Acquirer holding company that acquires and invests in exceptional, private businesses, deliberately built for long-term success. Our goal is to be the long-term custodian and permanent home of Great Australian Small and Medium Enterprises (SMMEs).

We are actively looking for businesses with the following characteristics:

• Business Model: B2B industrials: manufacturing and mission critical services

• Business Size: $3 to $6 Million of EBITDA

• Business Profile: Sticky B2B customer base

• Business HQ: Australia

Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, I’d love to hear from you. Please email us at [email protected]