Investing In The Candy Business
Alfonso X was the King of Castile, Spain in the 13th century. He was referred to as “The Wise” or “The Learned” and was quoted as saying “Burn old logs, drink old wine, read old books, keep old friends.” Which is a 13th century way of describing the Lindy Effect.
The Lindy Effect as described by Wikipedia “is a theorized phenomenon by which the future life expectancy of some non-perishable things, like a technology or an idea, is proportional to their current age.” Or, stuff that’s stuck around will probably stay around.
This is one of the oddest starts to a site dedicated to helping you make, save and invest money but stay with me.
The Lindy Effect made me think of Warren Buffett. In a year where tech companies and growth stocks fell off a cliff, headlines started covering that Buffett and Munger’s Berkshire, built on old school resilient businesses, had caught up to Cathy Woods ETF, which focused on every rocket ship regardless of profits.
You may not know, but Warren Buffett writes a letter to his shareholders every year and they’re all public. One of the best investors of all time lets you in his head every year for free. I highly recommend reading all of them starting from the beginning. But I’d like to highlight a gem from 2007. In a day when covering a story from a week ago is a waste of time I think we need to start embracing the Lindy Effect a bit more and covering items that have stood the test of time.
In the 2007 letter to shareholders Buffett covered the businesses that turn Munger and him on and which they wish to avoid. They look for:
A business they understand
One with favorable long-term economics
Able and trustworthy management
A reasonable price tag
They also look for companies that have a “moat” that protects returns on capital. This can be the lowest cost provider or a powerful world-wide brand. The moat also has to be able to last. I like to think of this as can you beat this company with x dollars. For example, if I gave you $100 billion dollars could you beat Nvidia? Amazon? Apple? Google? Likely not. Those are pretty good moats.
But Berkshire also focused on businesses with an advantage in a stable industry and this is where we’re introduced to the best business you never paid attention to. See’s Candy. They bought it in 1972 for $25 million and it was a driver of Berkshire’s success for years.
Now boxed chocolates aren’t electric vehicles, crypto, AI or the next big thing. From 1972 when they bought See’s to the 2007 annual letter sales by weight only grew 2% each year. Nothing to write home about. But sales grew from $30 million to $383 million and pre-tax profits grew from less than $5 million to $82 million.
Now here comes the most important part. To grow sales and profits over that timeframe they only needed $32 million reinvested in the business. Buffett thinks most businesses would need $400 million to fund that type of growth. They took $1.35 billion in pre-tax earnings out of See’s Candy and invested it elsewhere.
This is something that is lost in a day where venture capital playbooks focus on funding companies to get customers at any cost in hopes that one day they will own the industry and then can finally take some profits. Cash flow matters. Especially now when interest rates aren’t zero.
So when you’re building your company, or investing, think about the Lindy Effect. Think about See’s Candy. Can you build or invest in a company that can increase prices? Are you in an industry that isn’t too competitive? After all capital kills return on capital. Don’t believe me? Check out the cigarette industry returns since 1970 when they were forced to stop advertising.