- They did business all over the world, so they were insulated from what was going on in the US or Europe.
- They had a low debt to equity ratios.
- They generated enough free cash flow to fund their working capital needs, so they did not need to be begging the banks for money. This free cash flow also gave them access to the capital markets.
- They sold products that we use every day, what I call "essential services" products.
- They were the undisputed leaders in their businesses, which allowed them to influence the competitive landscape for their whole business sector.
- They had been around long enough to establish a powerful brand, and they were extending their brands in the developing countries of the world.
- They treated their shareholders like owner-partners by paying a generous dividend.
I told my friend that these companies did not have the power to issue currency, nor field a standing army, but in an increasingly global economy, they had something better. They had created mutually beneficial relationships with billions of people the world over, who, on a daily basis, chose these "Gold Standard" companies' products and services more often than those of their competitors.
I concluded with the following. "I said I called these companies "Gold Standard" companies. I mean that literally in this way. Gold has long held the mystique, if not the reality, of being the ultimate store of value. Thus, in very difficult times when the financial system creaks and groans lots of money always goes into gold until the dust clears. But Gold's rate of return over very long periods of time has been poor, little better than inflation. The "Gold Standard" companies that I was thinking of had just as impressive a record of surviving the bad times, but had produced a compounded annual return that beat gold handily."
"Gold Standard" companies have been refined in the flames of countless tough economic times. Companies rise to the level of the "Gold Standard" not because they have survived for 25 to 50 years, but because they have grown for 25 to 50 years.
My conversation with my friend was now over a year ago, and while things have gotten better, there are still worries a plenty. But as I remind our clients often, "We are not investing in countries we are investing in companies. Companies that have been tested by time and have become more powerful because of the testing."