The Lindy Effect states that:
“For non-perishable items (businesses, ideas, books, etc.) the observed lifespan of the non-perishable item is most likely to be at its half-life”
In other words, you can expect a non-perishable item that is 100 years old to last another 100 years, and a 5 year old non-perishable to last another 5 years.
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The Lindy Effect is very important for long-term investors.
Think about a tech darling like Facebook (FB). Facebook has a monstrously strong competitive advantage. It now generates over $10 billion in profit annually – and it was founded in 2004.
Now take a Dividend King as another example – say Procter & Gamble (PG). P&G has paid increasing dividends for 60 consecutive years – 5 times as long as Facebook has been in business. P&G was founded in 1837. It is the type of stock that is likely to create inter-generational wealth.
Based on the Lindy Effect, it is far more likely that Procter & Gamble is around – and thriving – 20 years from now versus Facebook.
Moving on from the example above. we know that selling stocks is detrimental to returns.
Therefore, you should buy stocks to hold for the long run. And the Lindy Effect helps to show what stocks are most likely to continue growing for decades.
The 1st rule of The 8 Rules of Dividend Investing is to invest in businesses with 25+ years of steady or rising dividends. These are ‘Lindy Effect Approved’ businesses that have proven they can withstand the test of time.
The Sure Dividend Newsletter uses The 8 Rules of Dividend Investing to systematically find high quality dividend growth stocks suitable for long-term investors.
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Article by Ben Reynolds, Sure Dividend