The idea of holding exceptional businesses indefinitely is appealing. It simplifies decision-making and aligns with the intuition that compounding works best over long periods. Yet the evidence suggests that very few companies sustain exceptional performance across decades.
Research by Credit Suisse on long-term equity returns indicates that a small minority of firms account for the majority of wealth creation, and even these companies often experience periods of stagnation.
Corporate longevity itself is declining. A study cited by Innosight shows that the average tenure of companies in the S&P 500 has shortened significantly over time, reflecting faster disruption cycles.
Even iconic businesses face limits: market saturation, competitive entry and shifting consumer preferences. As growth slows, valuations that once appeared justified can become stretched, leading to subdued returns.
The implication is not that long-term investing is misguided, but that it requires ongoing evaluation. Valuation, competitive positioning and capital allocation must be reassessed periodically. A rigid “buy and hold forever” approach risks ignoring structural changes in the business environment.
Disciplined investors often incorporate some form of rebalancing, trimming positions that have become expensive and reallocating to more attractively priced opportunities. This introduces a countercyclical element that helps mitigate the risks of overvaluation.
The challenge lies in balancing patience with adaptability. Enduring success in investing depends not only on identifying strong businesses, but also on recognising when the conditions that justified their valuation have changed.
Source: Credit Suisse; Innosight