Why We Love to Buy Boring Businesses
We’ve had the opportunity to evaluate and invest in all types of companies, including some “sexy” businesses — ones with high growth, brag-worthy products, or screw-the-rules teams with an average age of 25. While the “sexy” factor is never why we choose to invest, it can certainly be exciting. But the other end of the spectrum also attracts us; it contains what we call “boring businesses,” the almost invisible layer of the economy that hums under the radar, quietly supplying you with what you want and need.
We all know these boring businesses because they’re just down the street from us, in our small towns and suburban neighborhoods, as they have been for decades. They’re as likely to be located in Kearney, Nebraska, or Akron, Ohio, as they are to be in a major metro area. They go about their business without fanfare or splashy press coverage. Their employees aren’t “ninjas” or “rock stars”; instead, they are capable and loyal, putting in countless hours and delivering value, visible in the happy clients and strong financials.
Boring businesses don’t banter about valuations or recent capital raises because they have already found product/market fit, are profitable, and are growing sustainably. Adjusted for size and industry, these companies reinvest in their businesses at nearly double the rate of their public company peers (nearly 10 percent versus 4 percent of assets), showing their confidence in the future. They know their core competency, maintain low levels of debt, and treat their employees with care.
For every high-flying startup focused on 3D printing, wearables, or the sharing economy, there are thousands of boring businesses working for a very good living. That’s the thing about boring businesses: They just make money. According to the U.S. Small Business Administration, in 2008 (the most recent year for which data is available), these companies produced 46 percent of the nonfarm GDP, rivaling major corporation contributions and exceeding startup ventures as a category. While they may struggle by traditional definitions of innovation, they are highly focused on incrementally improving the lives of their customers and have the track record to prove it.
Some of these companies grow rapidly, but most do not. They’re not focused on “going big,” choosing instead to execute well on what their customers need, what the market provides, and what they can control, giving them a resilience against the changing tides of the greater economy. They also know what they don’t know, whether that means having an aversion toward cutting-edge technology or laughably outdated branding. Despite these gaps, they continue to make customers happy and generate profits. They’ve seen too many “sure things” come and go to get excited about the unproven; they choose to stay focused on the mundane day-to-day execution that keeps customers coming back.
All businesses have a shelf life: Competitive advantages erode, economies cycle unexpectedly, and life happens. But there’s an interesting theory called the Lindy effect, which asserts that some things, like ideas or books, actually get more durable over time. The chances that Plato will still be read in a thousand years are higher than the chances that the latest management book will be. We think the same principle holds for certain companies. The longer they’ve been around and weathered storm after storm, the greater the likelihood is they’ll continue to operate.
This longevity also creates mutually beneficial community effects. The Brookings Institute estimated that, in 2011, 77 percent of American workers were employed by organizations born at least 16 years earlier. In addition to creating those sustained employment opportunities, boring businesses are ingrained in their communities, having donated to local nonprofits and provided area leadership for decades.
The final component that makes boring businesses attractive comes in the form of their leadership. You won’t find boring business CEOs splashed on the cover of Inc. or hitting the speaking circuit. It’s not that they aren’t interesting or don’t have ideas worth sharing — they’re just not interested in the show. More often than not, their leaders are thoughtful, responsible, disciplined, and low-ego, probably because that’s what it takes to survive and thrive for decades.
For investors, the historical record of these factors is invaluable in assessing both the risk and the reward. There’s a reason why people like Warren Buffett spend so much time studying historic financials of companies in which they’re not even yet invested. While assessing a startup, investors must rely on plans, “gut,” and team members’ individual backgrounds; boring businesses, on the other hand, provide a fact-based, data-rich resource in their historic record. Can the company sustainably retain clients and produce a profit? Its record is in past P&L statements. What happens to the company when external market forces radically change? Just pick the time period to review the data. While history doesn’t necessarily repeat itself, it sets a much firmer foundation for understanding future potential.
So, for as much time as politicians, the media, and universities spend obsessing over the latest startups or “sexy” industries, we’d like to remind you that boring businesses are just as worthy of admiration — and sometimes investment dollars.
This post originally appeared in Forbes.
