How Adopting the Strategies of the World’s Leading Family-Run Businesses Benefits Long-Term Investing
At JA Group, we believe that true wealth encompasses both financial success and personal well-being. Our approach to wealth management is grounded in the principles of prudence, discipline, and a long-term view of the horizon. This approach closely parallels the way some of the most successful family-run businesses operate. Both family-run businesses and long-term investors prioritise stability, sustainability, and careful planning over quick gains and short-term trends.
The Backbone of the Global Economy: Family Businesses
While corporate giants often dominate headlines, the family-run business is, in fact, the backbone of the global economy. These enterprises, often run by multiple generations, have consistently outperformed their corporate counterparts on the stock markets, delivering superior shareholder returns. According to global management consultants McKinsey, family-owned businesses (FOBs) have sustained their winning streak through several key strategies that resonate with our investment principles.
Source: McKinsey. Average returns over cost of capital (%) of 600 publicly listed family-owned businesses versus 600 publicly listed non-family owned companies over time.
Frugality and Financial Discipline
Family-run businesses operate on the principle that the best dollar earned is the dollar not spent. This frugality is a cornerstone of their success, allowing them to maintain strict control over expenses. At JA Group, we echo this approach by advocating for prudent spending and careful financial planning. Just as FOBs embody thriftiness in both prosperous and challenging times, we guide our clients to make financially sound decisions that ensure long-term stability and growth.
Selective Capital Expenditures
FOBs are known for their selective approach to capital expenditures, investing only in projects that meet their rigorous standards. This financial discipline ensures that each investment is necessary and impactful. Similarly, JA Group prioritizes strategic investments that align with our clients' long-term goals. We focus on identifying opportunities that offer sustainable growth, ensuring that our clients' portfolios are robust and resilient.
Low Debt Levels
One of the defining characteristics of family businesses is their conservative approach to debt. Over a nine-year period, only 37% of their capital was financed through debt, compared to 47% for non-family businesses. This cautious borrowing strategy provides them with financial flexibility during tough times. At JA Group, we advocate for maintaining low debt levels to minimize risk and ensure financial stability. By avoiding excessive leverage, our clients can weather economic downturns with confidence.
Cautious Acquisitions and Diversification
Family-run businesses prefer smaller, safer acquisitions that align with their existing operations, averaging just 2% of their revenue in annual acquisitions. This cautious approach reduces risk and enhances stability. Additionally, a significant 46% of family businesses are highly diversified, using variety as a strategic shield against economic downturns. At JA Group, we believe in the power of diversification to protect and grow wealth. Our investment strategies are designed to spread risk across various asset classes, industries, and geographies, providing our clients with a balanced and resilient portfolio.
Global Expansion and Employee Retention
FOBs often pursue international growth, with 49% of their revenues coming from outside their home regions. This global perspective helps them tap into new markets and opportunities. JA Group shares this vision, seeking out global investment opportunities that offer long-term potential. Additionally, family businesses boast better employee retention rates, fostering loyalty and stability. At JA Group, we emphasize the importance of strong relationships, both within our team and with our clients. We strive to build long-term partnerships based on trust, transparency, and mutual respect.
A Long-Term Vision
Perhaps the most significant parallel between family-run businesses and JA Group's approach to investing is the focus on a long-term vision. FOBs are committed to nurturing the next generation rather than just meeting the next quarter's earnings. They prioritize cushioning against downturns over chasing short-term highs. At JA Group, we adopt a similar perspective, emphasizing the importance of patience, prudence, and a disciplined approach to investing. Our goal is to help our clients achieve enduring success, enabling them to prosper with purpose and peace of mind.
In Conclusion
The practices of successful family-run businesses offer valuable lessons for long-term investors. By embracing frugality, financial discipline, cautious acquisitions, diversification, global expansion, and a long-term vision, these businesses have demonstrated resilience and superior performance. Some of the biggest and oldest family-owned businesses, such as Hermès, Merck, and Hershey, have stood the test of time by adhering to these principles. Others like L'Oréal, LVMH, and Walmart have become household names through their strategic and disciplined approaches. By incorporating these proven strategies, investors can achieve lasting financial success and personal well-being. Embracing the wisdom of family-run businesses, we can navigate the complexities of the financial landscape and secure a prosperous and purposeful future.
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