When analyzing individual companies, there is a disconnect between our expectations and this base rate of performance.

Consider how investors value companies. We are trained to think about intrinsic value as the present value of the company’s future cash flows. This is of course technically correct. But it bumps up against reality.

I find it useful to think of companies as organisms. They operate in an ecosystem and they are subject to both a life cycle and natural selection. Some are resilient and adaptable, but most perish rather quickly. Eventually, they will be replaced by an entity better adjusted to the changing environment. Public companies have typically achieved reasonable size and are often mature, if not in decline, already.