Years ago, I discovered Nassim Taleb’s important and foundational concept of antifragility. Even after spending years thinking about the concept, I cannot help but still feel amateurish in understanding it’s full scope, but it is without a doubt one of the most important concepts I have ever come across.
Most things in the world are fragile. That is, most things break when stress is applied. However, some things are robust. These are things that can withstand greater stress without deforming (up to a point). I think most people likely already intuitively understand this and already conduct their lives in a way that at least tends towards robustness. For example, choosing a car that has better safety ratings.
But the concept of antifragility is better. Antifragile things are things that actually get better when stress is applied. Such a simple but incredibly powerful property! For example, the human body is antifragile with respect to pathogens. When we contract and recover from infections, we not only return to full health but better since our bodies will gain a level of immunity against future infections of the same kind.
Antifragility as a concept can also be applied to investments. In my experience, the concept is often applied relative to volatility. That is, any investment that not only withstands volatility but gets better with volatility. For example options.
However, I’ve often found it curious that the concept is applied to volatility, especially when taking into consideration Buffett’s oft-quoted adage, “volatility is the friend of the unleveraged long term investor”. For true long term investors, volatility is a benefit. For many businesses and investments, the true risk is time. Most businesses naturally get worse from time – more competition, more stasis, more dysfunction, more irrelevance.
The more interesting thing then, in my mind, are businesses that are antifragile with respect to time. These are businesses that naturally get better with time with limited effort.
Imagine how powerful such a business would be.
I contend that LVMH is a time antifragile business.
To most people, LVMH is just a luxury business. It is the world’s largest luxury business (selling leather goods, jewelry, spirits, luxury experiences), but I get the sense that many people view a business like LVMH as rather fickle. Because consumers are fickle. Fashions change. Tastes change.
How can one have long term confidence in a business like LVMH that is so dependent on fashion and design and the aspirations of the upper/upper middle class? More so when the vast majority of growth is currently driven by the Chinese consumer, whom are widely known to be fickle and un-loyal.
But LVMH is not a business driven by fashion and design. Fashion and design are important elements of what they sell, but LVMH’s promise has always been a purchasable identity of culture and heritage and sophistication.
This is most obviously clear in the spirits category. The MH in LVMH is for Moet Hennessy. The spirits they sell naturally get better with time. The stories and histories and heritage behind it all also get better with time. While the fashion and leather goods category obviously requires periodic updates as fashion trends change, the designs ultimately reference patterns that have been around for more than a century. The designs change ever so slightly but never so much that you lose the sense of heritage. And consumers buy it for that heritage, updated ever so slightly to the modern age.
LVMH recently acquired Tiffany. Tiffany blue box and the Tiffany Setting with respect to their wedding rings are the same way – time antifragile. Things that get better with time. The Tiffany Setting was created in the 1880s and today is still the most sought after wedding ring design.
I think many investors think the most important questions around LVMH are: What are Chinese consumers thinking? What new products are coming out? How reasonable is valuation?
The real questions should be – Is LVMH doing anything that damages its heritage? Is LVMH doing anything that damages its place in history? As long as it is no, LVMH should be a business that just naturally gets better over time.
As a quick aside, I am not arguing this with respect to luxury category in general. Hermès has the same property, but Gucci likely does not. Hermès has heritage, Gucci is often viewed as edgy and innovative. Gucci is much more of a true fashion business. Fashion is often time fragile.
Disclosures: I do not own shares in LVMH. I have no intention to transact in LVMH shares in the next 48 hours.