Peter Lynch: Learn to Earn: The Lives of Company

Peter Lynch is a wonderful investor. One of his less-known books, written with John Rothchild is Learn to Earn.  written in 1995

Chapter Three is about the Lives of a Company. If you want to invest in Growth at a Reasonable Price "GARP" then it is good to try to make a guesstimate of where a company is in its life cycle. 

The Company at Birth 

Usually not publicly listed. 

Going Public

Often when more money is needed than venture capitalists can supply. The business has to open up and "live in a fish bowl."

After the IPO excitement wears down and the price comes down is a good time for small investors to pounce on a bargain. 

The Company When It's Young

Full of energy, bright ideas, and hope for the future. Survival is far from assured. Maybe another company comes along with an even greater product that does the job better, or cheaper, or both. 

Differences between industries. Electronics for example is a highly competitive industry. Cash and the balance sheet are king, should be carefully considered at this stage. 

Growth is the reason young companies on the move can outdistance the middle-aged companies that have had their growth spurt and are past their prime. 

The Company in Middle Age 

More stable, brand, have learned from mistakes. Track record. Able to lend money. If they relax too much, leaner and meaner competitors will challenge them. 

Midlife crisis, thrashing around for a new identity. Reputation can be lost quickly. 

The Company When It's Old

Companies that are 20,30, 50 years old have put their best years behind them. You can't blame them for getting tired. 

Woolworth was old in 1995. It morphed into FootLocker in the US after the book was written. 

Old companies that were great earners in the past can't be expected to keep up the momentum. A few of them have: Wirgley's , Coca-Cola, Emerson Electric and McDonald's come to mind. But these are the exceptions. 

U.S. Steel, General Motors and IBM are three prime examples of former champions whose most exciting days are behind them. 

The steel business was a fantastic business and U.S. Steel stock hit an all-time high of $1087 in August 1959. This was the beginning of the electronic age and the end of the industrial age and the glory of steel, and it would have been the perfect time for investors to sell their U.S. Steel shares and buy shares in IBM.

U.S. Steel was a blue chip. Hardly anyone would have predicted that in 1995, U.S. Steel stock would be selling for less than it sold for in 1959. 

Today in 2023 X is selling for less than in 1995... 

There is a lesson here that may save you some grief in the future. No matter how powerful it may be today, a company won't stay on top forever. Being called a "blue-chip" or a "world class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name. 

... 

Patience is a virtue, but it's not well rewarded when you own a stock in a company that's past its prime. 

Extinct Companies

There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism. 

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Can companies fight aging and live forever? 

Some companies like Berkshire Hathaway are very aware that their businesses haven't lasted forever and they take capital from one old business and invest in new businesses. Koch Industries works consciously on Creative Destruction within its own businesses: https://kochmutualbenefit.com/content/Creative%20Destruction%20-%20Illustrating%20MBM  

Warren Buffett in 2022 Letter to Shareholders: Capitalism has two sides: The system creates an ever-growing pile of losers while concurrently delivering a gusher of improved goods and services. Schumpeter called this phenomenon “creative destruction.”