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In his recent memo, Ben Beneche, Co-Founder and Co-Portfolio Manager of the Pacific Tourbillon Global Equity Strategy, outlines their approach to identifying durable companies with the resilience to withstand competition, the adaptability to evolve and the capacity to deliver sustainable long-term returns.
Isaac Asimov once remarked that change is the dominant factor in society. Over a long investing career, you learn just how right he was.
The cornerstone of our approach is finding businesses that can endure – companies built to stand the test of time. Because a share of stock is simply an undivided fraction of a business, its ultimate value depends on the cash flows it generates over its entire lifetime. Yet investors routinely fall victim to recency bias, extrapolating current high profits far into the future and assuming today’s market darlings will rule forever. History tells a very different story. From 18th-century French monarchies to the rotating roster of world-leading corporations every decade, power shifts, leadership changes, and competitive forces inevitably erode high returns on capital.
The math of corporate longevity is stark. Academic research shows that a tiny minority of long-term compounders drive almost all market returns, while nearly half of all public companies end up underperforming short-term Treasury bills. When you run a discounted cash flow model, you realize that well over three-quarters of a company’s intrinsic value rests on the cash it produces more than five years out. If you want to outperform, you must find the rare businesses that survive and keep compounding.
Finding these durable compounders is hard work, so we stack the odds in our favour by sticking to a few simple, non-negotiable filters:
We avoid excessive debt. Leverage looks wonderful when tides are rising, but it strips away a company’s vital “slack” when trouble strikes. Heavy debt ruined Lehman and Enron, and it forced Carnival to heavily dilute its shareholders at rock-bottom prices during the pandemic.
A fortress balance sheet ensures a business can survive any storm.
- We respect the Lindy Effect. Products and industries that have already stood the test of time are far more likely to last another few decades than short-lived fads. The average age of a company in the Pacific Tourbillon portfolio is 89 years.
- We partner with exceptional managers who have skin in the game. Stock option programs often reward short-term risk-taking without any personal downside. We prefer owner-operators and stewards who hold meaningful equity, run their operations with a “capacity to suffer,” and reinvest in product quality and staff even during industry downturns.
- We insist on an unassailable Customer Value Proposition. At the core of our analytical approach – what we call our “fulcrum asset” and “symbiotic loop” frameworks – is the belief that a company only survives over decades if it offers a product or service that is unequivocally superior in the eyes of the customer. Providing genuine customer value manifests in pricing flexibility, steady market share gains, and long-term durability.
- Whether it’s Amazon passing immense economies of scale back to shoppers to create a massive “stakeholder surplus”, or Fielmann Group using vertical integration to offer German eyewear customers €3.3 billion in direct savings by selling glasses at €80 versus the €190 market average, offering a compelling value proposition builds a moat that competitors simply cannot breach.
As Charlie Munger noted at the 1998 Wesco meeting, getting rich in a competitive world shouldn’t be easy. There are no quick tricks or effortless formulas. But by refusing to overpay, avoiding debt, siding with principled managers, and backing companies that deliver undeniable value to their customers, we position ourselves to let time and compounding do the heavy lifting.
