Summary of this article
Past success may not guarantee future business durability.
Investors should track mega-trends, leadership and intangible strengths.
Adaptable incumbents and scalable challengers could shape future opportunities.
The next decade could bring strong opportunities in Indian equities, but investors will need to look beyond companies that have been successful for many years, according to Utpal Sheth, Founder & Mentor, Trust Group.
Speaking at The Money Question event in Mumbai by Outlook Money, Sheth explained why past success may not be enough to judge whether a company can stay relevant as technology, customer behaviour and business models continue to change.
Why Past Success May Not Guarantee Future Strength
Sheth used the example of Constantinople’s walls, which protected the city for almost 1,000 years before Ottoman cannons changed the nature of warfare in 1453.
“The walls had been built to withstand the attacks of the past; they were not built to withstand the attacks of the future,” Sheth noted. According to him, this is an important lesson for investors because a company’s past record does not necessarily show how well it can deal with future disruption. “Longevity proves past fitness; it does not guarantee future durability,” added Sheth.
Sheth has argued that investors need to examine whether a company’s competitive advantage can withstand changes in technology, customer behaviour, regulation and the value chain.
Three Factors That Can Shape A Company’s Future
Sheth identified three major factors that can influence a company’s long-term value: mega-trends, leadership and intangible strengths.
“Mega-trends deliver the tailwinds for the business. Leadership ensures that you partner with companies that become winners and capture the most of that mega-trend. And the intangibles are the factors that determine how long that leadership can sustain,” he said.
Sheth has described companies that meet all three conditions as “Gorilla companies”. He used the term for businesses that are rare, dominant, protected by less visible advantages and capable of lasting for a long period.
He also urged investors to rethink the traditional idea of a moat. “A better question today is: what happens to the moat when the world changes?” he said.
Adaptability And Scale Will Matter
Sheth has identified relevance, access, and economics as three areas where traditional business advantages can come under pressure.
He divided companies into incumbents and challengers. Incumbents have scale but need adaptability, while challengers have adaptability but need scale. “Our quest as investors is to look for adaptable incumbents and scalable challengers,” he said.
Sheth also highlighted value capture. A company may create value but struggle to capture enough of it for shareholders. “The moats of the future are dynamic moats,” stated Sheth, highlighting the need to track how quickly competitive advantages change.
