The Lindy Effect and Its Relevance in Investing

The Lindy Effect, as discussed in a recent DSP report, suggests that companies that have been around for a long time are likely to continue surviving for many more years. In simple terms, if a company has lasted 100 years, it is expected to stay for another 100 years. This idea is based on the belief that businesses that have survived multiple market cycles, economic downturns, and technological shifts have built resilience and adaptability over time.

The Strength and Weakness of Longevity

While the Lindy Effect sounds reasonable, its applicability in investing is debatable. Nassim Taleb, who popularized the concept, argues that the robustness of a business is linked to its lifespan. However, history has shown that many so-called “robust” companies with dominant market positions have eventually disappeared. In the last few decades, industries have evolved rapidly, and companies once considered too strong to fail have vanished due to technological disruptions, changing consumer preferences, or poor management decisions.

Survivorship Bias in Long-Lasting Companies

A key issue with the Lindy Effect in investing is survivorship bias. The companies we see today are the ones that survived, but many others have faded away. If we only analyze companies that have lasted for decades, we ignore the ones that collapsed along the way. Additionally, some firms that have survived for 100 years have done so by undergoing complete transformations—mergers, new management, or a shift in business models. The name might be the same, but the business could be entirely different from what it was decades ago.

Comparing Longevity with Performance

Simply surviving for a long time does not guarantee strong stock performance. Many older companies have stagnant growth, outdated business models, or declining market share. On the other hand, new-age companies often bring fresh ideas, disruptive innovations, and fast scalability. While older companies may have stability, younger firms with high-growth potential can sometimes offer better returns.

Balancing Stability with Innovation

For investors, the key takeaway is to balance stability with innovation. Companies with a long track record can be valuable, but they must continue adapting to new market conditions. At the same time, newer companies with strong momentum should not be ignored simply because they haven’t been around for decades.

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