The first real banana business began in the 1860s. It was literally a race against time. Profits were dependent on getting from port to port as quickly as possible, so as to avoid spoilage. Sail too long and they’d lose everything.
But once that first company sprung up, other’s soon followed. By the late 1890s, the market for bananas was booming.
Then just before the turn of the century, it stopped.
Like most booms, it could not last. Not because there was anything wrong with the product: the banana is perfect. Not because there was any scarcity in demand: people loved bananas from the start — the average American now consumes seventy a year. But because supply was uncertain… Most firms got their fruit from a single farm or valley, greatly increasing this vulnerability. The entire supply of many early traders could be wiped out by one bad storm.
This became painfully clear in 1899, the Year Without Bananas. There had been a heat wave, a flood, a drought, a hurricane. The market sheds were shuttered, the pushcarts stood empty. Dozens of firms went under. It was like the natural disaster that wipes out all but a few impossible-to-kill species.
The lessons from 1899 became obvious to the few surviving businesses. Since investing is very business-like, those same lessons transfer over.
Survival Was Key
The biggest lesson of 1899 was found in the wasteland of failed banana businesses. The surviving companies needed to be big enough, in strong financial shape, with enough capital reserves to survive anything mother nature threw at them.
Conveniently, survival offers a secondary advantage. The survivors of 1899 picked over good assets of dead companies for pennies on the dollar.
Investors may not need to worry about mother nature directly, but they need to be able to survive whatever the market throws at them. It’s easy to equate “capital reserves” to an emergency fund, a bond allocation, insurance, or anything else that avoids the risk of being wiped out entirely. Being prepared for a disaster in advance is half the battle.
The other half is where the real “capital reserves” kick in. Having the cash and the guts to grab assets for cheap because everyone else failed to prepare, is how companies strengthen their position. Business is cut throat. So is investing.
Companies realized they couldn’t rely on one supplier or shipper or anything. They needed to control everything from planting, harvesting, transportation, distribution — anything that might upset the balance of costs and profits, supply and demand. They couldn’t control mother nature, so they had to settle for the next best thing.
There are very few things investors control. You control what investments you do (and don’t) buy, when you buy it, when you sell it, and what you do in between. You control your savings rate too. That’s about it. You don’t control the prices the market offers or the returns you might earn from an investment today or in the future.
Like the banana companies of old, you can put yourself in the best position to do well and that’s it. The rest comes down to faith in the soundness of your decisions.
Companies needed to own fields in multiple regions to avoid the risk of losing their entire supply to a natural disaster in one area. Later, they would diversify into new products — coconuts, pineapple, sugarcane, timber — to reduce the impact of a down year in bananas.
The risk of tying yourself to one region (or putting all your eggs in one basket), like home country bias, is discussed endlessly. And the risk is still ignored.
When one market does extremely well for a while, like the US for instance, doubling down on that market might seem like a great idea. In doing so, you likely take on more risk.
Diversifying across multiple regions (international and emerging markets) lowers the risk of prolonged poor returns in any one region.
Being Big Isn’t Enough
The aftermath of 1899 led the way for big business to control the banana market.
United Fruit was created the same year. The founders of thee businesses — essentially merged into one — created the largest banana company in the world. It controlled 75% of the market. And they ran it no differently than today’s market leaders. Their treatment of competition was simple: buyout or crush.
But today’s market leaders become tomorrow’s has-beens. Founders move on or pass. New management takes their place, but it’s not quite the same.
A corporation ages like a person. As the years go by and the founders die off, making way for the bureaucrats of the second and third generations, the ecstatic, risk-taking, just-for-the-hell-of-it spirit that built the company gives way to a comfortable middle age. Where the firm had been forward-looking and creative, it becomes self-conscious in the way of a man, pestering itself with dozens of questions before it can act. How will it look? What will they say? If the business is wealthy and strong, the executives who come to power in these later generations will be characterized by the worst kind of self-confidence: they think the money will always be there because it always has been.
Complacency and bureaucracy create opportunities for new businesses to thrive. Sam Zemurray created one such startup in 1893 that made a fortune for himself and his investors.
He did it by selling what Boston Fruit (the precursor to United Fruit) considered trash. He found a niche the market leader failed to see and exploited it. Then he ran circles around them.
It’s hard to look at many of the dominant companies today and think which ones will fade away in a few decades. A handful will last. Others are sure to see hard times. A few will recover but never quite achieve their prior dominance. The rest will die.
And some of today’s small companies will dominate the markets of tomorrow.
Permanence is not something investors should expect. It helps to remember that returns are tied to the success and failure of businesses. And there will always be opportunities for investors who don’t fall prey to complacency themselves.
The Fish That Ate the Whale