Deliver them live, the.
Magnificent Seven, the nifty to fifty fang stocks. These describe those must own, set and forget companies that absolutely have to be in your portfolio. If you want to keep up, buy them, own them, put them away forever, and you're set for life. Or are you. The list of once great companies that dominated their ears is Long, Sears, Woolworth, AT and T, General Motors, WorldCom, Remember Market, Darling, General Electric. It dominated the nineteen nineties. It's now a fraction of
its former glory. These stocks are not one offs. They're the normal fate of all companies. I'm Barry Ridoltson on today's edition of At the Money. We're going to explain what you need to understand. All companies go through a normal life cycle. To help us unpack all of this and what it means for your portfolio, let's bring in Professor Aswath Damaduran of NYU Stern School of Business. He
has written numerous books on valuation and finance. His newest book is out this month, The Corporate life Cycle, Business, Investment and Management Implications. So Professor, let's start with your basic premise. Tell us about the concept of corporate life cycles, and how they're similar to human life cycles and go through specific stages of growth and decline.
I mean, let's start with the similarities. I mean, aging brings its benefits and its costs. The benefits of aging is I now can get the senior discount at Denny's on the now, so that's a minor benefit. But I also going to bring the benefit of more financial security. You're not responding. I mean, you don't have the responsibilities you'd had when you're younger. But it does come with constraints. I can't jump out of bed anymore. So aging comes
with pluses and minuses. And when I think about businesses, I think about it in the same way. A very young a startup is like a baby needs constant care and attention. In capital young company is like a toddler a very young company. You age, you become a corporate teenager, which means you have lots of potential, but you put it at risk every day, and then you move through the cycle, just like a human being does. And just like human beings, companies fight aging. They want to be
young again. And you know what, there's an ecosystem out there that is designed to tell companies that can be young again. Consultants bankers selling them products saying you can be young again. I think more money is wasted by companies not acting their age than any other single action that companies take. And that's at the core of how I think about corporate life cycles.
You have an age at that.
Age, Huh, that's really fascinating. I love the five specific stages of that corporate life cycle. You describe startup growth, mature growth, mature, decline, and distress. Tell us a little bit about the distinct features of each of those stages.
The challenge you face when you're a young company is survival. I mean two thirds of startups don't make it to year two. Forget about a year, five, year ten. So as a startup, you don't have a business yet. You've got a great idea, and most of these great ideas is crash and burned.
They never make it to the business stage.
So that stage you need somebody as an idea person who can come up with this great idea, convince employees, convince consumers that the idea can be converted to a product. It's all about story. You're telling a story. The second stage, you're building a business. Very different skill set right supply Chaine. You've got to manufacture your product. You've got to get it out there. Third stage, you're now an established business model, asking can I scale this up? Remember, most companies can't
scale up. They hit a ceiling and then they stop. Some companies are special. They're able to keep growing even as they get bigger. You mentioned the fang Am the Mag seven, and if you look at what they share in common is they were able to grow even as they got bigger. That's what made them special. And then you become middle aged, a mature company. You're playing defense. Why because everybody's coming after your market. You could argue that even among the Mag seven, Apple is playing more
defense and offense. They have the smartphone. It's at seventy five percent of their value. They've got to protect that smartphone business. And then you're going to decline. And companies don't like this. Managers don't like it.
Decline.
You're just managing your business as it gets smaller.
It's not your fault.
It's not because you're a bad manager, but because your business has started shrinking. So at each stage, the skill sets you need, the mindset you need, the challenges you face will be different, and that's why you often have to change management as you go through the life cycle.
So let's talk about those transition points between each of those stages. They seem to be particularly dangerous for companies that don't adapt at least don't adapt well to that next stage. Tell us about those transition points.
Transition points are painful.
I mean, they're painful for humans, they're painful for companies. The transition point for an idea company becoming a young company is coming up with a business model. Doesn't happen overnight. You've got to try three or four or five before one works. The transition point for a young company becoming growth companies what I call in bar mits for a moment, because when you're young company, companies cut you slack. Now
investors cut you slack. They let you grow. We talk about the number of users and the number of subscribers you have, and they push.
Up your value.
But there will be a point where those investors are going to turn to and say, how are you going to make money? You know how many young companies are not ready for that question. I mean that's what to me separated Facebook from Twitter, Facebook, whatever you think about Mark Zirckelberg was ready for that question when was asked. It had a model it could tell you how it meant. Twitter's never quite figured out how to make money, and
it's not a young company anymore. It failed its bar Mitz for a moment because it wasn't ready for that question. So when I think about life cycles, I think about transition moments, and good Man is as ready for the next transition moment. They're not caught by surprise.
But it's not easy to do.
Do these life cycle stages vary across different industries or is it pretty much the same for all companies?
Oh, and this is where corporate life cycles and human life cycles are different. A corporate life cycle can vary dramatically in terms of duration. The oldest company in history was a company called Congo Gumi.
I'm sure you never I don't know whether you've heard of it.
It's a Japanese business that have started in five seventy one eighty.
It lasted fifteen.
Hundred years and all it did was build Japanese shrines. That was its core business state in life for fifteen hundred years. Why because it stayed small it was family run. There was a succession plan and it never got distracted. If you look across publicly traded companies, now there are some companies. To become an established company, you have to spend decades in the wilderness.
I mean you mentioned G and GM.
Think how long it took those companies to go from being startups to being established companies because they had to build plants and factories. In contrast, we think about think of a company like Yahoo founded in nineteen ninety two, becomes one hundred billion dollar company in nineteen ninety nine. So what took for for seven decades to do? Yahoo did in seven But here's the catch, it took y'aho only seven years to get to the top. They stayed
at the top for exactly four years. You can date their fall to en Google enter the market, and think how quickly Yahoo disappeared.
So the capital.
Intensity of your business matters, your business strategy matters. And one of the things I think we've kind of encouraged and pushed in the twenty first century, and I'm not sure that it's a good thing or a bad thing, is we've designed business models that can scale up quickly with very little capital. Think Uber, think Airbnb, intermediary businesses. But the challenge with these businesses is it's going to be very difficult for them to stay at the top for long, and when they go into.
Decline, it's going to be precipitous.
And I think that changes the way we think about the corporate life cycle of the twenty first century company versus the twentieth century company. And I'm afraid business schools are not ready. All of what we teach in business schools is for the twentieth century company, and the twenty first century company might have a much shorter life cycle and it will require a very different set of business strategies and decision making processes to the twentieth century companies.
So let's talk about some of those decision making processes. If I'm an investor looking at companies in different life cycle stages, will that affect the type of valuation technique I should bring to analyzing that company.
It's not so much evaluation technique, but the estimation processes are going to vary. I mean, let's take an example. Let's suppose your value Coca Cola. You have the benefit of one hundred years of history, you know the business model you can draw on just data and extrapola. You could be just a pure number currentch it's all about projecting the numbers out and you could be okay.
But if I came to you.
With zoom a peloton and I asked you to value now or palenteer, there's not a whole lot of historical days you can pull on, and that historical data is not that reliable. So the difference, I think is you have fewer crutches when you value young companies. You have less to draw on, and that's going to make you uncomfortable, and you've got to be willing to live with that discomfort and make your best estimates.
One of my concerns.
When I have students in my class is they're so concerned about getting things right, So how do I know I'm right? And I tell them you're definitely going to be wrong, accept it, and move on. With the young companies. You have to accept the premise that the numbers you're going to come up with are going to be estimates that are going to be wrong, and you've got to be willing to say I was wrong and revisit those estimates.
And that's a mindset ship that some people can make, and some people have trouble with they're so caught up in being right they can never admit they're wrong.
So let's talk about different investment strategies and philosophies, like growth or value investing. How do these align with different life cycle stages. I would imagine a young startup might be more attractive to a growth investor, and a mature company might be more attracted to a value investor.
And we self select.
Right, if you think about growth investing as including venture capital at one extreme to you know, the Magellans of the world, we buy, you know, high growth companies. Growth companies tend to be focused in on the younger stage companies you Value investing tends to be focused on more mature and declining companies. Now that's okay as long as you recognize that, because what it will do is create portfolios that are kind of loaded up with those kinds
of companies. I mean, if you think about one of Warren Buffett's laments is that he never invested in technology companies early in the cycle until.
Apple came along.
We looked at Berkshire Hathaway's investments, they tend to be in mature companies.
But that shouldn't be a lament the approach.
That value investors, at least old time value investors took almost self selected those companies. It will be impossible for you to buy a young growth company because you're so caught up in buying stocks with low pe ratios or lots of book value, lots of cash that you essentially missed those companies because you were designed to miss them.
So I think as long as people recognize that your investment philosophy will lead you to kind of cluster in one section of the life cycle, which will create risks and dangers for your portfolio, I think you're okay. But I think that people who tend to be blind to that often often miss the risk that come with their investment philosophy.
So there are some companies that seem to successfully transition between the various stages you've identified. How should investors think about these companies? How can they identify when a management team has figured out how to transition from growth to mature growth.
I'll give you very two examples.
This year, both Google and Facebook initiated dividends for the first time in their history, and I was happy. I own both stocks, And the reason I was happy is let's face, Google and Facebook are not young growth companies anymore. They're trillion dollar companies which are looking at earning's growth in the long term, probably in the high single digits. And when people look at eight percent growth, they say, well,
that's disappointing. You have to recognize if we're a trillion dollar company growing at eight percent, that's a.
Healthy growth rate.
And I think what impressed me about both Google and Facebook, and I call them by their old names not matter in alphabet, is the management seems to be realistic about where they're under life cycle. That's what paying dividends tells you is we understand we're no longer young growth companies. We're more mature, and we're going to behave like more mature companies. And I think that again reflects what I said earlier. If you act your age, it's a much
healthier sign for your company. It doesn't mean you're not going to grow, but you're going to grow in a healthy way.
It sounds like you're talking about both adaptability and then transformation between stages.
Right, and a management team that recognizes that what you need as a company will shift depending on where you're in the life cycle.
They're not overreaching.
So to wrap up, all companies go through corporate life cycles. Their startups, they grow, they mature, and eventually they decline. Understanding this life cycle, identifying when management is transitioning appropriately identifying these companies at the right valuation is the key for long term investing. If you're paying too much for a company in a mature decline or even distress segment, your portfolio is not going to be happy. I'm Barry Ridults.
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