Author Nassim Taleb coined the term ‘antifragile’ to more accurately describe things that ‘benefit from shocks’ and ‘thrive and grow when exposed to volatility, randomness, disorder, and stressors, and love adventure, risk and uncertainty.’1 While adversity breaks the weak and tests the resilient, it invigorates and strengthens the antifragile. A well-known example of this is Michael Jordan’s reaction to not making the varsity basketball team as a high school sophomore. Though acutely painful, this setback stoked Jordan’s competitive fire and catalyzed spectacular improvement: he made varsity the next year, and only two years later hit the game-winning shot to clinch an NCAA Championship. A dynasty of NBA Championships and MVP awards soon followed. From humble beginning to superlative end, Jordan’s athletic career was shaped by antifragility, which, in his case, was expressed by an aggressive conversion of criticism into undaunted forward momentum.
For investors, the importance of this concept is obvious: companies that can, like Jordan, turn adversity into advantage will win versus those that merely endure or worse. Though simple, this framework can be profoundly differentiating because responses to stress compound over time. In Darwinian market environments, antifragility is the distinguishing characteristic of all companies that thrive over the long term.
What makes a company antifragile?
As ‘Iron’ Mike Tyson famously put it, “Everybody has a plan until they get punched in the mouth.” Every company gets its bell rung sometime... success is about what happens next. Winning, antifragile organizations possess three distinguishing attributes: 1) low vulnerability 2) high resilience and 3) dynamic adaptability.
First, vulnerability is about risk, both in terms of exposure and materiality. The critical question is business model risk, especially competitive moat durability, industry position and structure, and growth opportunity. Next, resilience, or the ability to take a hit, concerns margin structure, capital intensity, and internal funding capacity. Lastly, adaptability is about offense, requiring organizational agility, management acumen, and a growth orientation. Importantly, these criteria must be assessed in order as each empowers the next; for example, an excellent culture never gets the chance to mobilize if the business model has a proverbial ‘glass chin.’
The coronavirus pandemic – unexpected, universal, and brutal – was a haymaker. However, for French beauty company and archetypal antifragile business, L’Oréal, these extenuating circumstances presented an extraordinary opportunity to win market share (below left chart). The company’s adaptive dynamism also kicked in post-GFC2 and during the European debt crisis (2010-2013, below right chart).
Revenue growth
Source: Company information. Organic growth at constant exchange rates.
L’Oréal surged ahead not despite these disruptions, but because of them. When the pandemic struck, L’Oréal’s vulnerability was already low. The company had strong, well-invested brands in structurally growing categories across diverse geographic and channel exposures. L’Oréal was also positioned to absorb financial shocks, even if prolonged, with high gross margins, a net cash balance sheet, low capital intensity, and strong free cash flow. From this advantaged position, L’Oréal’s growth-oriented culture reacted with confident agility, strategically ramping investment in ecommerce, digital engagement, and resilient product categories such as luxury skincare.
Antifragile companies, such as L’Oréal, experience risk differently. Stressors become catalysts to rally, level up, and become more competitive and economically relevant. Those poised to gainfully evolve grow earnings more quickly and resiliently than competitors and the broader market. Ultimately, share prices reflect these favorable fundamental developments. The earnings and share price progressions of our featured antifragile pugilist, L’Oréal, are displayed overleaf.
Source for both charts: Company information as of June 2022.
Recent times feel uniquely uncertain. Perhaps they are, but so it often seems. Stretch out the time horizon long enough and everything can change. Investors can reduce exogeneous risk — and even convert anxiety into anticipation — by backing antifragile businesses that accelerate fiercely off the ropes.
1 Taleb, N. N. (2013). Antifragile. Penguin Books.
2 Global financial crisis.
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