Buy & hold... for how long?
The first question any Buy & Hold investor must answer is simple: for how long? I’ve had many clients tell me they buy and hold “forever.” Warren Buffett often used that word too, but what he really meant was “indefinitely” which is a vastly different thing. Buffett understands something many investors overlook: every company has a half‑life. Growth and rising profitability eventually give way to stagnation, which eventually give way to decline. No corporation escapes this path of growth, plateau, entropy, and finally extinction.
There is exactly a 100% chance that the company you own today will not be around at some point in the future. If you are lucky (or skilled), it might get bought out for a premium. But many firms wait too long for the right offer, and by the time it comes, they are being sold off for parts.
Entropy always wins in the long run
Entropy is the slow and steady decline of an organism until it ultimately reaches extinction. We don’t usually think of corporations as experiencing entropy, but they do, and the proof is in the numbers. Before we get there, it helps to understand how entropy shows up inside a company.
At their core, corporations are a collection of people who have certain skills. In the early stage, they experience growing pains as they scale. Those who are slow to adapt are quickly removed from the gene pool.
Then comes middle age, where the old guard wants to keep things “in the family” while the younger cadre wants faster growth, increasing profits, and generous bonuses. Again, Darwinism does its work and weeds out the companies that are stuck in the old ways of doing things, in favor of the young upstarts who are not afraid to try out new ideas.
Finally comes extinction, where there is no longer a viable path back to profitability, so the company is either bought for parts, or dissolved quietly.
Environmental shocks: why adaptation, not age, determines survival.
Like humans, companies that adapt to their changing environment survive. Those that don’t, won’t. The obstacles accumulate slowly:
- Ever-increasing levels of bureaucracy
- Hanging on too long to legacy systems
- cultural rigidity
- decision‑making drag
These challenges and others like them accumulate over time, which creates organizational fragility.
Corporate mortality follows a V-shaped curve: early high failure rates, then stability, then rising failure rates later in life. This pattern mirrors biological systems, with mortality rising as entropy accumulates.
If a company is successful in the early innings, chances are it will decide to expand on that success to bring more prosperity to all stakeholders. Naturally, they will need more employees for this expansion, so that means more levels of bureaucracy.
Next comes the stage where the younger cohort wants to move faster, but the old guard feels like they are already moving at warp speed. This tension between old and new ideas for the future leads naturally to hanging on too long to “legacy” systems and procedures. This retards the growth potential of the firm and allows competitors to make inroads to their customer base.
There is also a kind of “cultural rigidity” that happens once middle-age is passed. Emphasis is given to ceremonial events and nostalgic rituals, while important business often takes a back seat. Decision-making slows. Eventually, the drag becomes terminal.
Every company has a half-life.
In a corporate setting, a half-life it a moment when adaptation begins to lose ground to entropy. The average half-life is 10 years, but the timing of each specific case is unknowable. There are no alarms that sound. No line item in the 10-K. No Press release announcing that the company has quietly shifted from its adaptive phase to its fragile phase.
Publicly traded companies exhibit a constant hazard rate, which means their probability of failure is essentially the same every year, regardless of age. This means the companies don’t die because they get old; they die because they stop adapting.
This is why the V-shaped mortality curve matters. Early failures come from inexperience. Late failures come from accumulated fragility. In the middle, companies appear healthy and stable, but that stability is deceptive. Entropy is already working in the background, slowly eroding adaptability, creativity, and boldness.
Most companies disappear quietly. They don’t “flame out.” They draft, they stall, they hesitate, and they lose the ability to make bold decisions. Once decision-making drag sets in, the second half has already begun.
Case Study: Nike (NKE)
Nike was once the model of a first-half company. They had it all:
- Explosive innovation
- Cultural relevance
- Global brand dominance
- Strong capital allocation
- Relentless product cycles
- Marketing that rewrote the rules of endorsements
For decades, Nike lived in the adaptive phase — the part of a company’s life where energy exceeds entropy. They innovated faster than competitors, set the pace for the industry, and defined athletic culture worldwide.
But the last decade shows a clear, measurable shift into the entropy phase.
Nike Inc. (NKE)
Nike still makes a great product. People still recognize the brand. The swoosh still carries cultural weight. But the stock tells the truth that the narrative hides: over the last ten years, Nike has delivered a cumulative return of –22%, including dividends. That’s not a cyclical dip. That’s structural decline.
What happened? The same forces that erode every aging corporation:
- bureaucracy thickened
- legacy systems lingered
- cultural rigidity set in
- decision‑making slowed
- competitors adapted faster
Nike did not suddenly collapse under its own weight. It quietly transitioned from its growth and stability phase to its entropy phase, which is the signature of a company entering its second half‑life. Innovation slowed. Product cycles lost urgency. Younger brands like HOKA, On, and Lululemon captured growth Nike assumed it owned.
Nike is still alive and profitable. But it is no longer adaptive. It has crossed the invisible boundary where entropy quietly overtakes innovation.
Final thoughts
When someone tells me that they buy and hold, I tell them honestly that's the best way to build wealth over time. But it's understood that the investor will sell some of his or her holdings when circumstances demand it. Those circumstances are defined by the investor, but most know when it's time to exit a position. Especially a losing position.
I can overlook a temporary stumble by a company, as long as their long-term prospects remain intact. But when I see two quarters in a row of declining earnings, or narrowing margins, I would rather shoot first and ask questions later. By doing this, I increase my odds of staying in the growth stage of the companies I invest in. I do my best to avoid hanging around while the company slowly begins to deteriorate.