Dr Ajibola Awolowo
A life of constant learning is an ideal I hold myself to. Each day, I try to learn something new through reading or interacting with others. When I am not reading, I am most likely listening to a podcast. There are countless educative and helpful podcasts out there, mine inclusive. Recently, while listening to one about investing, the guest said, “Trees don’t grow to the sky”. I found those words very instructive. I have never heard of a tree grow so tall that airplanes had to navigate around it.
I dwelt on those words for days and it led me down the path of reading about the world’s tallest trees. Unsurprisingly, the tallest trees were not the oldest trees.
The world’s oldest known tree is called Methuselah (a befitting name indeed). It is a Great basin Bristlecone Pine tree growing in the White Mountains of Inyo County, California. It is 4,854 years old!
If you’ve never seen a picture of this tree, you’ll be forgiven if you assumed that the oldest tree in the world will be in a well-manicured garden with big branches, have lush green leaves, beautiful flowers with a sweet smell, delicious fruits and lots of birds nesting high up in its branches. This rosy picture is far from the truth.
If you google “Methuselah oldest tree”, you’ll be disappointed to see pictures of a dry, seemingly dead tree that looks only fit to be used as firewood, growing in a mountainous and obviously difficult terrain. It has no leaves, houses no bird nests and looks very boring. There are no exact measurements but Great basin bristlecone Pine trees rarely grow taller than 50 feet. How can a tree that is older than the Pyramids in Egypt be so unassuming? What can we learn from this and how can we apply it to our investing?
Every living organism grows. Some have very high growth rates while others grow slowly. Organisms utilize the nutrients and resources available in their environment to grow. Therefore, the more plentiful the resources and nutrients in an environment, the more organisms it can support and the more growth that is seen there.
For example, the Amazon jungle is rich in resources and it therefore supports a wide variety of wildlife. The Sahara Desert, on the other hand, lacks water, has a harsh climate and only a handful of species of plants/ animals can survive that terrain.
Even though all living things grow, this growth comes at a cost. For trees growing in a resource-rich environment like the Amazon, they must contend with competition. Many trees grow within a few square meters of each other. Their roots compete to get a good grip on the soil while their foliage struggle to get direct sunlight. They compete for pollinators and because they lack space, they have to make sure their offspring (seeds) grow a good distance away from the parent tree.
They have adapted to these problems by developing strong wide-reaching roots to have good support, tall trunks that reach as high as possible, strong branches with lots of leaves to catch the sunlight, bright flowers that attract pollinators, sweet fruits that birds/ larger animals can feed on and inadvertently transport the seeds far off from the parent.
Unfortunately, all these adaptations make them vulnerable as well. The huge foliage at their tops means they sway more in fast winds and their tall trunks can snap under the force of these winds. Their tall trunks also make them attractive to loggers/ tree fellers as raw materials for furniture and buildings. The animals/ insects the tree attracts makes them vulnerable to diseases.
The fact that they have also grown so big makes them dependent on the constant supply of nutrients from their ecosystem. A slight decline in the available nutrients may mean that the tree might not be able to meet its requirements and die painfully. Alas, even trees in the resource-rich Amazon do not grow to the sky.
Looking back at Methuselah Tree, we can now see reasons why the oldest tree in the world is no taller than 50 feet, has no flowers/ fruit, does not have large branches or impressively green leaves and has no birds nesting in it. By growing in the harsh environment of the mountains, its competitors are few and far between. It can afford to grow slowly over many centuries off the little nutrients available which it does not have to share with numerous rivals.
We may be attracted to the beauty of a tall, green, flowery, sweet-smelling tree with delicious fruits that is bursting with bird songs but those are markers of a passing fad and not longevity.
Like tree and all living things, companies grow. Some grow fast, some slowly while others are in decline. Some companies operate in highly desirable industries such as technology while others are in ‘boring’ sectors such as manufacturing.
Companies operating in sexy and fast-growing sectors can be likened to trees growing in the Amazon. Revenues and profits are attractively on the uptrend. Dividends are flowing steadily. The shares of such companies are in hot demand which make their valuation very robust.
We saw this scenario play out in the dot com bubble of the early 2000’s and we know how that ended. We have also seen this recently in the US stock market where technology companies traded at outrageous valuations such as Tesla trading at a price to Earning ratio of over 1,300.
You can argue that the examples above were driven by euphoria in the market but you will agree that growth is not cheap. The capital that companies need to fund this growth can come from debt or equity. By taking on excessive debt, companies expose themselves to shocks and uncertainty while the indiscriminate sale of equity stakes dilutes the retail investor out of relevance. Both options are risk laden.
As a retail investor, when the hype and attractiveness of an asset, a market, an industry or a company is at its loudest, remind yourself that even trees in the Amazon do not grow to the sky. Rather than chase after fads, look for sustainable growth, particularly when it can be bought at a reasonable price. The best places to find this will be in assets, markets, industries or companies which are deemed old-school. You are more likely to find a gem along the path few tread rather than on the well beaten path.
On every exchange, there are companies with long track records of good performance. Some have even been in operation for over a century. These companies must be doing something right for them to have stood the test of time and their longevity is not an accident. As a retail investor, you owe it to yourself to look deeply at them.
The effort we expend on trying to reinvent the wheel and find the next big thing will yield better returns if we spent it on the already big, obvious but possibly boring things that are staring us in the eye. Warren Buffett started buying shares in Coca-Cola in 1988. The company was 96 years old at the time he purchased it and he has since quadrupled his holdings. He is still yet to sell one unit of the shares he bought in Coca-Cola even after making over 2,000% returns in that deal alone.
I am not advocating that we only buy companies that are a century old or ignore the new in favour of the old. Rather, I hope this article makes you remain conscious of the tried and tested companies, though they lack attractive bells and whistles unlike the new kid on the block who may just be a melting ice cube.
Dr Ajibola Awolowo is the brain behind Value Nigeria Podcast. He can be reached via valuenigeriawithajibola@yahoo.com