The Secrets and Survivor Bias of Truly Great Companies That Last for Decades
The success of a company is somewhat suspected of “survivor bias,” so one must be very cautious when discussing corporate success. However, if an investor wants to invest in a great and successful company, he has to explore the secrets of success in a great company, because he must think deeply about whether the company he invests in has outstanding and evergreen qualities. This seems to be an unsolvable contradiction. How to balance and eliminate this contradiction seems to be a difficult problem.
In “Everlasting Excellence: Seven Secrets of Great Companies” by Charles Ellis, he used five companies as examples to summarize seven characteristics of “great” companies. The five firms are McKinsey, Capital Group, Mayo Clinic, Goldman Sachs and Kravas LLP. These seven characteristics that lead to excellence are: Mission: establishing an inspiring long-term goal; Corporate culture: the way a company does things; Recruitment: selecting the most suitable talents; Talent growth: professional training, employee education and organizational management; Customers Relationship: Customer value lasts forever; Innovation: Changing the rules of the game; Leadership: The key to playing with the seven weapons.
Reappearance of “Business Success Learning”
It would appear that Charles Ellis’ research methods were probably similar to those of Jim Collins or Tom Peters.
In “Built to Last”, Jim Collins selected 18 companies that meet the characteristics of “forward-looking” from more than 1,400 companies, and talked about the internal factors of these companies’ long-term prosperity, including General Electric, 3M, Merck, Walmart, Boeing, etc. He attempts to identify the fundamental qualities and dynamics that these companies share that distinguish them from other ordinary companies, and translates these findings into useful conceptual frameworks to provide practical guidance for entrepreneurs interested in building great companies that will stand the test of time.
In “The Pursuit of Excellence”, Tom Peters first selected 62 companies that he considered to be outstanding and outstanding from thousands of listed companies in the United States, and then selected 43 companies among them, conducted benchmarking research, and finally concluded that they have common characteristics. eight principles. These eight principles represent the benchmark for success.
However, even Jim Collins eventually found that only 126 of the 1,435 companies he studied, or 9%, continued to be “excellent” for 10 years or more. Most companies eventually fail or become mediocre. It is obviously impossible to attribute the failure or mediocrity of these companies to strategic mistakes. In fact, most of these companies are working hard to pursue excellence. Among the 43 companies studied by Tom Peters, 14 had already experienced financial crisis ten years later, and one had gone bankrupt.
Charles Ellis also pointed out in the preface that none of the top ten companies in the United States in 1900 was in the top ten fifty years later. Not only that, there are only three families left that barely survived. In the appendix of the book “Super Strong Stocks”, Ken Fisher lists the 30 companies that were constituents of the Dow Jones Industrial Average in 1983. Only 5 companies remain in 2023, namely Procter & Gamble, American Express, and IBM. , 3M, MSD. You must know that these companies are top companies among top companies. It can be seen that it is definitely not easy for an enterprise to last forever, and failure or mediocrity is the norm.
The disappeared “far-sightedness”
In “The Halo Effect”, Phil Rosenway has long revealed the major illusions commonly seen in the business world, especially how the halo effect clouds our vision. Rosenwei said that some business books that claim to reveal the secrets of success or the path to fortune, claiming to be thoughtful and meticulously researched, are actually just the level of storytellers.
Indeed, like Charles Ellis, Collins and Peters reveal in their book “basic principles and patterns that apply universally.” The companies they study are not ordinary people. They are all the best among the best in the business world and the best among the best in the financial industry. However, Rosenwei pointed out that the reason why a company performs well is often the result of the interaction of many complex factors. And these factors, even if we use “scientific” methods to rigorously infer them, can only solve part of the mystery, let alone easily say that these factors are the lessons for the success or failure of all business management.
But there are too many management books that claim to have found the real reasons why a company succeeds or fails. Using sharp logical reasoning and the ability to “turn over old accounts,” Rosenweil pointed out that a high proportion of the inferences and findings in management books simply cannot stand the test. At best, they are nothing more than the “halo” that people have for successful companies. effect” illusion. As a result, managers are surrounded by all kinds of illusions and have no way of knowing the essence of business success.
Rosenwei’s unique insights attracted the admiration of Nassim Taleb. Taleb said that he was deeply attracted by the book “The Halo Effect” because it destroyed the myths about the characteristics of success created by empirical judgments in management books. It is the most important book ever written. One of the management books. “For those best-selling books written by masters that are full of nonsense, full of mistakes, and childish, this book is an antidote.” Of course,
this is only the personal view of Rosenwei and Taleb. Jeff Bezos regards “Built to Last” as a classic work on business management.
But wouldn’t it be best to include these “great” and “forward-looking companies” as investment targets? James Montiel, author of “Value Investing”, observed that in the 10 years before the end of Jim Collins’ study (1980-1990), 71% of these companies beat the market index, with an average return of more than 21%. The S&P 500 is only 17.5%. But what happened next didn’t seem so wonderful.
In the five years after Jim Collins published his study, only half of these companies were more profitable than the S&P 500, with an average return of 25%, while the S&P 500’s return improved to 24%. Next, between 1991 and 2007, these “visionary companies” returned an average of 13%, while the S&P 500 returned 14%. On average, the earnings power of these company stocks is no better than that of the S&P 500 Index.
Consider again the companies that are compared to “visionary companies.” Prior to Jim Collins’s study, the performance of the companies being compared was indeed poor. Their average return over the same period was 12%, compared with the S&P 500’s 17.5% return. But over the five years following the study, the average return for all companies compared was 25%, and the S&P 500’s return was 24%. Between 1991 and 2007, the average return for the compared companies was 14.6%, the S&P 500’s return was 13.6%, and the average return for the “visionary companies” was only 13%. It’s also worth noting that more of the companies being compared have beaten the market’s average return.
It follows that the criteria used against Jim Collins appear to be incapable of selecting a true winner.
Business success is subject to “survivor bias.” In fact, Charles Ellis also understood the role of luck. He specifically discusses this issue in Chapter 9 of “Excellence Evergreen”. In his view, in every successful person and every successful organization, there can always be found elements that lead to major turnarounds due to luck. When every outstanding company looks back on its development history, even if it recalls how inevitable its success was, it can always trace one decisive factor along the way—luck. While these stories involving luck may sound pleasant, focusing on luck itself is meaningless; what matters is the parts outside of luck.
Why can’t a foundation last forever?
In reality, business success and failure are complex. Success is not all the result of survivorship bias. Professor Wang Liming believes that from the perspective of the evolutionary meaning of biological evolution theory, “evolution” implies a directionless trend and more hints at the randomness in the evolutionary process. Not all evolutionary directions will lead to survival. and reproductive opportunities. Under different environmental conditions, the emergence and enhancement of new biological characteristics may not always bring survival advantages; the weakening and disappearance of a certain biological characteristic may not always bring survival disadvantages.
In the business world, in the early stages of the emergence of a new business format, when the degree of homogeneity of contestants is high, intra-specific competition in a commercial sense is most likely to occur. The fierce competition and mutual annexation between American oil giants and railroad giants during the Gilded Age is a typical example. In the Internet era, this kind of intra-specific competition in a commercial sense has become even more obvious. The competition between China’s three major portals, three major social tools, and three major long-form video websites is actually all.
Winning intraspecific competition is the basis for the survival and development of biological individuals and business organizations. After all, just like biological individuals, companies can only create more in a longer time scale only if they first win intraspecific competition or the opportunity to survive and reproduce. possibility. Even for the vast majority of business organizations, if they do not seek to become a century-old business, the only skill they need to master is intraspecific competition. But for a company that wants to be built to last, winning intraspecific competition is not enough. A company that just plans to “die” by making money does not need to consider environmental competition at all. Only those business organizations that hope to last forever must consider the constraints of the external environment—especially the changes in the external environment in the political, economic, and policy aspects of the human world. Their change speed far exceeds changes in the natural environment.
Evolution may be the most comprehensive and ultimate innovation methodology on the planet. However, from the perspective of evolutionary theory, innovation is still a costly and risky task that can easily reach dead ends and dead ends, leading to the ultimate “innovator’s dilemma.” As long as environmental factors remain constant, evolution has a direction and an end. Along this well-directed path, the Red Queen effect drives continual small improvements in organisms from generation to generation. This is the so-called “path dependence” effect.
Natural selection selects results, not processes. From this perspective, “survival of the fittest” is actually not as revealing of the nature of natural selection as “reproduction of the fittest”. Only those organisms that can successfully survive to reproduce successfully are the fittest in the eyes of natural selection. Natural selection selects organisms that fit the characteristics, not the characteristics the organisms possess. Creatures that can pass natural selection are of course the fittest, but not all the characteristics of the fittest are necessarily successful. Therefore, the characteristics of companies that can achieve “forward vision” such as those listed by Jim Collins in “Built to Last” do not mean that they will be able to continue to be successful in the future. Moreover, the screening criteria of natural selection may change at any time.
Once the direction of evolution has been determined, the descendants of organisms can only rush all the way to the end along the route designated by this main line. This is another “local optimal trap”: every innovation and every change makes organisms for the better, but all these changes added up do not give an overall best survival strategy. From an evolutionary perspective, the evolutionary process of organisms always “lives in the present”. They only focus on what characteristics can maintain survival and reproduction opportunities at this moment, and do not make long-term plans. But every time the most beneficial choice is accumulated, it may not always lead to the most ideal final result. This also explains why the foundation cannot remain everlasting. Yes, in the process of corporate evolution, the past successes are real, and the ultimate failures are also real. Therefore, both success and failure are worthy of our study.
In the history of evolution, large and small fluctuations in the earth’s environment have continued to occur and are inevitable. The more successful a species is, the more specialized it is; the more specialized it is, the less able it is to withstand environmental fluctuations, and the extinction of the species becomes an inevitable outcome. Because from the moment life began to evolve, death and extinction were already waiting quietly at the end of the evolutionary road. The tree of life itself may be “built to last forever,” but every branch or leaf on the tree will wither one day. Given this, we shouldn’t be surprised that any company isn’t built to last.
Matthew Effect Winner Situation
However, stopping evolution means extinction. And if it continues to evolve, it is possible to obtain the Matthew effect. The most concise expression of the Matthew Effect is “the strong get stronger and the weak get weaker” or “the rich get richer and the poor get poorer”. The Matthew Effect will produce an effect of amplifying advantages. No matter how weak the advantage is at the beginning, with the blessing of the Matthew Effect, the winner will always take all in the end. In the process of evolution, the Matthew effect requires only a trivial 1% improvement in beneficial mutations as a whole, and it can wipe out the entire species with a snap of a finger, thus becoming the winner.
In this context, the Matthew Effect will be further strengthened. Future success will still belong to those companies that have been successful before, not because previous success has created favorable conditions for them, but because previous success has verified their potential talents. According to the Matthew Effect, mere success itself increases the likelihood of future success. Regardless of the mechanism, companies that have been successful before are more likely to be successful in the future. But if the only reason some companies continue to succeed while others fail or are mediocre is because of differences in “talent,” that means fate favors some companies from the start while neglecting others. If the Matthew Effect is real, then every success a successful company experiences creates better opportunities for the next success. Because success will snowball like a snowball.
In a 2018 study funded by Burke Investments, Arizona State University professor Hendrik Besenbinder looked at the compound returns of nearly 62,000 common stocks around the world between 1990 and 2018 and came up with two Conclusion:
First, from 1990 to 2018, the top 1.3% of companies created $44.7 trillion in global stock market wealth. Outside the United States, less than one percent of companies account for $16 trillion in net wealth creation. These results highlight that the distribution of long-term stock returns is strongly positively skewed.
Second, there have been a total of 25,332 listed companies in the U.S. stock market over the past 90 years. However, about 96% of them (24,240) listed companies created basically no value; the best-performing 1,092 stocks, only about 4% of the total listed companies created most of the returns. Among them, the best 90 stocks account for only 0.3%, but they create 1/2 of the total wealth of the entire U.S. stock market.
In the report, Bessenbinder ranked the top 50 listed companies that create the most wealth for shareholders, in order: Apple, Microsoft, Amazon, Google parent company (Alphabet), Exxon Mobil, and Berkshire Hathaway Wei et al., creating a 40% increase in wealth. Some of these companies were established very early, for example, only Exxon Mobil was established in 1926, while some were established in the past ten years.
All of these companies can be called great or great. This is the kind of company that Warren Buffett and Charlie Munger have dreamed of investing in for decades. Hendrik Besenbinder revealed the extreme Matthew Effect in today’s business world, further strengthening Buffett-Munger’s strategy of investing in great companies. Among Buffett-Munger’s hundreds of investment projects, it is a few great companies such as Coca-Cola and American Express that have achieved the miracle of Berkshire Hathaway. From this perspective, although we all know that great companies may be the result of “survivor bias”, it does not mean that we give up investing in such companies. If this proposition is true, then it is still necessary to explore the successful experience and basic characteristics of great companies.
At the same time, we should also be clearly aware that although there are many companies with ambitions, there are very few companies that ultimately become outstanding. For human organizations, it is incredibly difficult to transcend excellence, achieve and maintain excellence. The vast majority of companies will probably never achieve excellence, and most of those that do achieve excellence will usually not remain excellent for very long. But despite this, we take pleasure in observing examples of true excellence and learning from them how to make our investments even better.
