One of my favorite books? The Outsiders by William Thorndike.

He analyzes the best CEOs in the world and what makes them unique.

Let’s learn how you can find and invest in the best CEOs in the world.

The Outsiders

In the past, we have already made a summary of Will Thorndike’s book.

In case you missed it, you can grab it here:

Book Summary: The Outsiders

Forget Wall Street CEOs

How do you think the best CEOs on Earth look?

When you ask someone on the streets, they’ll probably answer the following:

• He flies private or at least business class

• He has a fancy Wall Street office

• He has years of experience

• He has a lot of charisma

The ultimate businessman in a picture:

The ultimate business leader, right?

Think again.

The best CEO could be your neighbor.

He’s a true family person, happily married, and living a balanced life.

Great CEOs keep things simple. They value every dollar and prefer jeans and T-shirts over designer suits.

They don’t need luxury to prove their worth. They show their greatness by creating long-term value for shareholders.

Mark Leonard of Constellation Software is a great example of this.

By the way, have you heard of Pinetree Capital (TSE: PNP)?

It’s a publicly traded fund focused on VMS businesses.

They benefit from the knowledge and experience of Constellation Software.

It’s run by Damien Leonard, Mark Leonard’s son.

Does Damien have the same iconic beard as his dad? Who knows, he avoids the media just like his father.

Great CEOs stay outside the spotlight and work in Spartan offices.

Interestingly, there’s an inverse relation between the construction of elaborate new headquarters and investor returns.

The simpler the office, the higher the return for shareholders.

Just look at Warren Buffett’s modest office.

A fun fact? He still works at his father’s desk from the 1950s.

And these basic offices? They are often in small towns far away from Wall Street’s noise.

This gives these managers a big advantage: it helps them to avoid herd behavior.

As Buffett said:

In other words, the best managers are independent thinkers.

Here’ the difference between an ‘Outsider’ CEO and a ‘normal’ CEO:

Outsider CEOs are known as excellent capital allocators.

Capital allocation

The most important task of management is capital allocation.

Mark Leonard, one of the best CEOs ever, said the following about this topic:

In other words, a single capital allocation decision can change everything.

A great CEO isn’t just an operator, they’re an investor.

That’s exactly why Warren Buffett once said:

Another thing great CEOs have in common? They don’t like to pay dividends.

They prefer acquisitions and share buybacks instead.

Many CEOs mentioned in The Outsiders heavily bought back their shares when their stock price crashed.

Our Outsider CEO

Let’s put the theory to the test.

Our Portfolio has a CEO who fully embodies the Outsider principles.

That CEO? August Troendle (CEO & Founder of Medpace).

If you want to check yourself if a CEO meets Outsider standards, look at two things:

1. Capital Allocation

2. Track Record

Let’s see how August is doing.

Capital Allocation

Imagine you have $10,000 in savings and want to entrust it to an investor.

How would you judge their performance?

It’s simple: you’d check whether they turned every dollar you invested into more dollars.

Managers are investors, too. You should evaluate them the same way.

Warren Buffett captured this idea with his famous $1 Test.

In other words, companies should create more than $1 in value for every $1 they keep.

An example:

• If a company earns $100 million and creates only $50 million in shareholder value, it fails.

• If it earns $100 million and creates $150 million in value, it passes.

Now, let’s look at the situation for Medpace.

Here’s the evolution of Medpace’s Net Income.

It went from $39.1 million to $491.5 million.
That’s an increase of $452.4 million.

Since 2017, Medpace’s Market Value went up from $1.4 billion to $17.5 billion.

That’s an increase of $16.1 billion

This means August Troendle can be seen as an excellent capital allocator.

Another way to evaluate management’s capital allocation skills is to examine the evolution of Return on Invested Capital (ROIC).

As a rule of thumb, I want ROIC to be consistently above 15.0%.

Here’s what this number looks like for Medpace:

Track record

The track record of management can already tell you a lot.

When a CEO has been leading the company for 20 years and the business has done exceptionally well over this period, it tells you something.

Let’s see how Medpace has performed.

We begin with the returns to shareholders.

Since the IPO in 2016, the share price has grown at a CAGR of 34.0%.

These are very attractive returns.

Conclusion

That’s it for today.

We want to invest in companies led by excellent managers.

The best book to learn about excellent managers? The Outsiders by William Thorndike.

Use this checklist to find the best leaders:

• Capital Allocation:

  • The $1 Test of Warren Buffett

  • The evolution of the company’s ROIC

• Track Record:

  • How shares have performed under the manager

  • Growth of Owner’s Earnings

It’s great to see August Troendle (CEO of Medpace) ticks all the boxes.

Everything In Life Compounds
Pieter

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Finchat: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

In investing, it all starts with the moat or competitive advantage.

Understanding the existence and durability of the moat is key to becoming a great investor.

Let’s talk about how important moats are and give an update on Our Portfolio today.

What is a moat?

A moat or durable competitive advantage is what gives a company a superior business position.

It allows the business to maintain and increase its profit margin and market share.

Our Companies have strong moats that let them keep growing their Free Cash Flow year after year.

Warren Buffett thinks of the company as a castle.

The moat is made up of the advantages that protects those inside the castle and prevents outsiders from getting in.

How do you know the company has a moat?

A moat is a structural business characteristic that allows a firm to generate excess economic returns for a long period of time.

This can come from different sources:

• Switching Costs

• Network Effects

• Cost Advantages

• Intangible Assets

A quick check for a moat?

Look for companies with a:

• High and stable Gross Margin (> 40%)

• High and stable ROIC (> 15%)

When both metrics look good, it’s a strong sign that the company has a moat.

Let’s take Games Workshop as an example.

They sell tabletop games where players use small figures to fight battles in fantasy and science fiction worlds.

They also have high, stable gross margins, and a high ROIC that’s trended up over time.

Another thing companies with a moat have? Pricing power.

Charlie Munger said that a few times in your lifetime, you’ll find a company which could raise its return enormously by just raising their prices, and yet they haven’t done it.

This gives them a lot of untapped pricing power.

Games Workshop is one of these types of companies.

Every year they raise their prices 4% or 5% and players just keep buying more.

S&P Global and See’s Candies are also great examples of companies with pricing power.

That’s why these types of companies outperform the market:

What if the company loses its moat?

One of the most dangerous things for a Quality Investor?

When the moat shrinks or goes away entirely.

Just think about what happened to Nokia or Kodak in the past.

The market is fearful something similar is happening to Fair Isaac (FICO) right now:

FICO had what many investors thought was one of the widest moats in finance.

FICO’s credit score was a key part of how the financial system worked.

• Required by GSEs: Fannie Mae and Freddie Mac required Classic FICO scores for standard mortgages. Lenders had no choice. To sell a loan to either company, they needed a FICO score.

• Three-Bureau Standard: Lenders usually checked all three major credit bureaus: Equifax, Experian, and TransUnion. They pulled credit reports and FICO scores for each borrower.

• A Toll Booth on Lending: FICO earned a fee on almost every mortgage, car loan, and credit card issued in the US.

Credit score fees are a tiny fraction of total closing costs on a $400,000 mortgage, so FICO thought they had limitless pricing power.

Between 2022 and 2025, FICO raised mortgage score prices by 800%.

Revenue and profits shot up:

So did the stock price:

The three major credit bureaus (TransUnion, Experian and Equifax) haven’t liked paying royalties to FICO.

As a result, they created VantageScore as a joint venture in 2006:

For years, VantageScore struggled to compete because mortgage rules favored FICO.

But FICO kept raising its prices. They were too aggressive.

This pushed lenders and credit bureaus to look for alternatives.

FICO’s moat depended largely on rules set by the Federal Housing Finance Agency (FHFA).

FHFA director Bill Pulte pushed to approve VantageScore 4.0 alongside FICO.

He also moved Fannie Mae and Freddie Mac toward a single mortgage pricing system.

Overnight, the regulatory barriers that forced the mortgage world to rely on FICO started to shrink.

A great test of a moat is if customers stay when a viable competitor shows up.

Very quickly after the FHFA changes, Rocket Mortgage adopted VantageScore as their preferred model to cut origination costs.

When the largest mortgage lender in the country can swap out your product for a competitor, your switching costs are not as high as Wall Street thought.

That’s why FICO’s stock is now down more than 70% from its high:

The FICO case can teach us three important lessons:

1. Untapped pricing power can lead to very high returns, but can lead to problems if the company abuses it

2. Some moats are more durable than others: a regulatory moat only works as long as the rules don’t change

3. A moat is widening or shrinking every single day

This is why we constantly reassess our convictions.

When a company’s moat is shrinking, or isn’t as strong as we thought, we sell it.

Just like we did to some of Our Positions recently (Dino Polska, LVMH, Novo Nordisk).

Let’s dive into Our Portfolio Update to see how our companies are doing.

Read more

Today it’s time for a new position switch.

We are positioning Our Portfolio for great returns going forward.

The expected return of Our Portfolio right now? 17.1% per year.

We expect the Free Cash Flow of Our Portfolio to evolve as follows:

Including extra additions to Our Portfolio, it looks even better:

As Warren Buffett said:

Some exposure to Private Equity

I think it’s interesting for every investor to have some exposure to Private Equity.

Private Equity?

This basically means you invest in non-listed companies.

For private investors like you and me, it’s harder to buy these kind of companies.

But it’s interesting as they have a higher return than stocks in general:

Over the long run, US private equity has returned roughly 12–14% a year after fees.

That’s higher than the average return of stocks.

I wouldn’t consider investing directly in Private Equity within my circle of competence.

That’s why it’s important to surround yourself with competent people with high integrity.

The good news is you can invest in amazing Private Equity companies on the stock market.

What’s also important to understand?

By investing in a Private Equity firm, you maximally benefit from the power of compounding.

Let’s say:

• A PE firm has $1 billion in Assets Under Management (AUM)

• The unlisted equities return 10% per year on average

• They collect 1% in yearly fees

In this example, you collect $10 million in fees in year 1.

However, in year 10, the PE firm will have approximately $2.6 billion in AUM.

This means they will collect $26 million in yearly fees.

So these kind of companies already win big thanks to the power of compounding.

If you combine this with extra inflows from clients, the AUM Private Equity companies manage increases even more.

As a result, Private Equity companies that get net inflows will by definition outperform Private Equity itself.

Two companies

Currently, we own two companies in the Private Equity space:

Read more

Some of the world’s best quality investors? Akre Capital Management.

They have compounded capital at 12.4% over the past 15 years.

Recently, we had the honor of sitting down with the investors behind Akre Capital Management:

• John Neff

• Andrew Millette

• Trey Tickner

Let’s share their amazing wisdom.

The famous “Three-Legged Stool”

Akre Capital Management is synonymous with “The Three-Legged Stool”.

It’s their investment framework.

The legs are:

1. Extraordinary business

2. Talented management team

3. Reinvestment opportunities

The Akre team walked us through that model. Let’s see what you can learn from this.

How many A.I. stocks belong in a quality portfolio?

And not just how many… but which ones?

Have you been following Pieter’s recent articles and stock picks?

Then it’s not a theoretical question.

In fact, multiple stocks in the Compounding Quality, Compounding Dividends, and Tiny Titans portfolios are heavily involved with Artificial Intelligence (AI).

But what Pieter is thinking about now is way more extreme.

A huge new position… with his own personal cash… in a “pure-play” AI company (a company that’s entirely about AI).

One that has already more than doubled this year.

Has he lost his mind?

His nerve?

Or did he perhaps… lose a bet?

You’ll find out on G-Day, from Pieter himself.

Want to find out more?

Sign up here and get access to the beta version of our e-book: ‘10 Most Dangerous Myths of Growth Investing’.

Grab the G-Day e-book for free

1. Extraordinary business

The core bedrock of Akre’s philosophy is:

No sense to complicate things, right? It’s as easy as that.

And if you want to earn a good return as an investor, you might as well just pick businesses that earn good returns themselves.

This idea is very similar to what Munger and Buffett use.

They say it’s very hard to earn a good return as an investor in a business that earns a bad return on capital itself.

That’s why the Akre team always looks at the return on Owners’ Capital and return on Total Capital.

The formulas they typically use are:

2. Talented management team

The second pillar is a talented management team.

Spotting talented managers is much more subjective.

Akre Capital Management uses an easy, practical tool to assess management.

The more you hear the words “per share” or “EPS”, the more excited you should become.

Business growth is irrelevant if management has to issue new shares all the time.

It’s per share-growth that matters for shareholders, not overall growth.

You can very easily test this yourself.

Just open an annual report or earnings call transcript and search for “Per Share” or “EPS” using Command + F.

If there are a lot of matches, it’s likely you have a shareholder-friendly management team.

If there are no matches, the management team probably isn’t shareholder-friendly.

For example, if you open Prem Watsa’s 2024 shareholder letter (Fairfax) and search for “Per Share”, you’ll find 40 matches.

That’s a good sign of shareholder-friendly management.

It suggests that Prem Watsa puts shareholders’ interests first.

3. Reinvestment opportunities

Management can raise money in several ways: by taking on debt, issuing new shares, using cash from the business, or selling assets.

They can also use that money in different ways: buying other companies, buying back shares, paying dividends, investing in growth, or repaying debt.

Deciding where to get money and how to use it is called capital allocation.

The capital allocation decisions made by management are key for shareholder returns.

What does the Akre team not like as a capital allocation tool? Dividends.

They actively avoid companies where the dividend payout ratio is high or rising quickly.

Instead, they want to invest in companies that can keep reinvesting earnings at high rates.

As Chuck Akre says:

Some quality investors are not big fans of acquisitions.

But the Akre team is different.

They own several serial acquirers like:

• Constellation Software

• Topicus

• Lumine

• Roper

• Perimeter Solutions

“Compounding machines”

When you put the three legs of the “Three-Legged Stool” together, you get what the Akre team calls a “Compounding Machine”:

Akre on portfolio management

While The Three-Legged Stool is easy to explain, it’s very hard to find companies that meet all three criteria.

If you only invest in the best businesses in the world, your list of potential investments is very short.

Compounding machines are rare.

Let’s translate this into 3 rules the Akre Team uses:

1. Concentrate your investments

2. Add to existing positions

3. Lower your portfolio turnover

1. Concentrate your investments

John Neff used a great analogy to explain concentrated investing: coin flipping.

If you flip a coin, you have a 50% chance of getting heads and a 50% chance of getting tails.

Flip it 500 times, and you’d expect around 250 heads and 250 tails.

The more you flip, the closer you usually get to 50/50.

But flip the same coin just 8 times, and the result can look very different.

You might get 6 heads and 2 tails, or 7 tails and 1 head.

The same idea applies to stocks.

The more stocks you own, the more your portfolio tends to move like the broader market.

A more concentrated portfolio gives you a wider range of possible outcomes: you could outperform the market by more, but you could also underperform by more.

The Akre team believes concentration is key to outperforming.

The Akre ETF has almost 50% of its portfolio in just 5 stocks: Mastercard, Constellation Software, Brookfield, Visa, and Moody’s.

2. Add to existing positions

The second idea behind Akre’s portfolio management follows naturally from the first.

If you want a concentrated portfolio, you should spend most of your time adding to existing positions instead of buying new companies.

Part of this is psychological.

It’s exciting to add a new stock to your portfolio.

There’s a certain satisfaction in finding another company to own and growing your “empire.”

But that’s not how you should invest.

You rarely need to open new positions.

Instead, they spend most of their time adding to existing positions.

Their goal isn’t to own more companies.

It’s to own more of their best ideas.

3. Low portfolio turnover

Once you find a compounding machine, you should be very hesitant to sell.

Time is the fuel that powers a compounding machine.

John Neff quoted Chuck Akre himself:

Chuck Akre’s best investment is American Tower. It’s a 200-bagger for him.

The only way to turn an investment into a 200-bagger is to hold on after it becomes a 100-bagger.

Three Stock Picks

To finish the conversation, we asked the million-dollar question:

“If you were stranded on a deserted island and had to invest all your money in one stock, which one would you choose?”

Three interesting ideas were shared.

CoStar (Pitch by John Neff)

In 2009, early in his career, John Neff applied to work at Akre’s firm. To convince Chuck Akre, he pitched Moody’s.

Since then, the stock has become a 20-bagger. Moody’s is still a key position in Akre’s portfolio today.

A company Neff is excited about today? CoStar ($CSGP).

CoStar Group is a leading global provider of data and analytics for commercial real estate.

As John Neff puts it: “They are digitalizing real estate.”

CoStar recently had its worst drawdown falling from $94.5 per share to $28.5:

KKR (Pitch by Andrew Millette)

Andrew Millette picked KKR.

The Akre team had recently met with KKR’s management and came away very impressed.

They said KKR is a bit like Berkshire Hathaway, where you can almost blindly trust management to allocate capital well.

Please note KKR is in the Compounding Quality Portfolio too.

Now let’s dive into the final stock pick.

Mastercard (Pitch by Trey Tickner)

Trey Tickner picked Mastercard.

One interesting fact the Akre team shared?

The first credit card payment dates to 1950.
It shows how resilient the business model is.

If you didn’t know, one of the most famous Visa and Mastercard quotes comes from Chuck Akre:

This quote is now 9 years old. Chuck Akre shared it during a talk at Google.

Since then, Visa and Mastercard have only gotten stronger.

Visa’s net margin is now 50.8%, up from 36.5% when Akre gave the talk.

The average U.S. business has a net margin of 7%-10%.

That means you could now almost cut Visa’s net margin in half three times and still be close to the average U.S. business.

Talking about a compounding machine!

Conclusion

That’s it for today.

Here’s what you can learn from the Akre team:

• The Three-Legged Stool:

  • Extraordinary business: Look for high-quality business with strong returns on owners’ capital

  • Talented management: Buy companies with strong management teams that think in per-share value

  • Reinvestment opportunities: Invest in businesses with long runways and a low dividend payout ratio

• Portfolio management:

  • Concentrate your investments: remember the coin-flipping analogy

  • Add to existing positions: usually, the best investment is a stock you already own, not a new company

  • Low portfolio turnover: A 100-bagger is a 50-bagger that doubles

• Interesting stocks:

  • CoStar: a business digitalizing real estate

  • KKR: an almost Berkshire-like capital allocation machine

  • Mastercard: a credit card business with 4x the Net Margin of the average business

A big thanks to the Akre team for sharing their incredible wisdom!

How many A.I. stocks belong in a quality portfolio?

And not just how many… but which ones?

Have you been following Pieter’s recent articles and stock picks?

Then it’s not a theoretical question.

In fact, multiple stocks in the Compounding Quality, Compounding Dividends, and Tiny Titans portfolios are heavily involved with Artificial Intelligence (AI).

But what Pieter is thinking about now is way more extreme.

A huge new position… with his own personal cash… in a “pure-play” AI company (a company that’s entirely about AI).

One that has already more than doubled this year.

Has he lost his mind?

His nerve?

Or did he perhaps… lose a bet?

You’ll find out on G-Day, from Pieter himself.

Be there on G-Day

Everything in life compounds
Team Compounding Quality

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

What’s going on in the markets? And what are our favorite stocks?

Let’s inspire you today.

Subscribe now

September 2026

Last month, the S&P 500 increased by 1.8%:

Source: Fiscal.ai

Investors are ‘Fearful’ today according to the Fear & Greed Index:

Best & Worst Performers

This overview shows you the best and worst performers in our investable universe.

Worst performers

The cheaper we can buy great companies, the better.

Here are the worst performers of the past month:

Fair Isaac (FICO) is having a very hard time currently.

They are losing their monopoly and the stock gets heavily punished for this.

Best performers

These stocks did well in the past month:

Fortinet is doing amazing.

The stock is up +137% since the beginning of the year.

🏦 Spotlight: Nu Holdings ($NU)

Nu Holdings (Nubank) is a bank that works fully online. You won’t find a single branch.

They started with a free credit card in Brazil.

That’s how they pulled customers away from the big banks and their high fees.

Today, Nu gives you the full package:

• Savings accounts

• Personal loans

• Investments & insurance.

The company is active in Brazil, Mexico, and Colombia.

Nubank makes money in two ways:

• Interest Income (86%): Interest on credit card balances and personal loans.

• Fees (14%): Small amounts stores pay on every card payment, plus money from premium services.

Why is it an interesting company?

Banks in Latin America earn an estimated $140 billion together from everyday customers.

Most of these markets are still dominated by inefficient oligopolies with high fees.

Nu Holdings stepped in and completely disrupted the Big Five banks in Brazil by offering zero-fee accounts and high-yield savings all managed inside a world-class app.

Nu’s moat?

Super-low costs and a rock-solid brand:

• Because they have no physical branches and run on modern cloud technology, it costs Nu less than $1 per month to serve a customer. Traditional banks spend over $4.

• People love the brand so much that 80-90% of new customers join through free word-of-mouth referrals. This results in virtually zero customer acquisition costs.

Once customers enter the Nu ecosystem, they tend to adopt more products over time.

Plenty of growth potential

Nu went from net losses a few years ago to generating serious cash.

In Q2 of 2026, Nu Holdings generated more than $1 billion in net income in a single quarter for the first time in company history.

The company is expanding aggressively into Mexico and Colombia, giving them a long runway for growth.

If they can replicate the success they’ve had in Brazil in these new markets, Nu could become very large, and very profitable.

Did you like this?

Nu Holdings is a growth stock.

You can find our 5 favorite growth stocks here:

5 Growth stocks

Best Buys October 2026

Let’s now dive into our five favorite buys for the month.

These are our favorite stocks that aren’t in Our Portfolio yet.

In other words: these stocks are the most likely to be added.

As a reminder, you can always access Our Portfolio here.

5. Investor AB ($INVE-B.ST)

Investor AB is an active owners in some of the highest-quality companies in the Nordic region and the world.

They hold major stakes in businesses like Atlas Copco, ABB, and EQT.

Investor AB is a very high Quality company.

Management thinks in decades and focuses on creating long-term shareholder value.

Their underlying companies generate a lot of cash, which Investor AB reinvests.

Last quarter, its Intrinsic Value rose by another +9%.

Investor AB is an amazing company, but it’s still trading at a premium to its NAV.

We’d be thrilled to own it, but at a slightly lower valuation.

4. MercadoLibre ($MELI)

MercadoLibre is often called the Amazon of Latin America.

Just like Amazon, they have multiple businesses.

• Mercado Libre: The largest e-commerce marketplace in the region.

• Mercado Pago: A leading digital payments and fintech platform.

• Mercado Envios: A world-class logistics and fulfillment network.

MercadoLibre benefits from a triple-flywheel effect.

1. More buyers attract more sellers to the marketplace.

2. As more people buy and sell on their platform, more people adopt their payment network: Mercado Pago.

3. Mercado Envios gives them another significant advantage.

Latin America historically has complex logistics, poor infrastructure, and unreliable postal services.

MercadoLibre solved this by building its own fulfillment network from scratch.

Because they control the whole thing, they can guarantee fast, reliable shipping.

Competitors can’t match their delivery speeds.

The heavy investments in fulfillment are paying off.

In the most recent quarter, there were 225 million same and next-day shipments.

This is a +38% increase year-over-year.

As you can see, MercadoLibre is growing its revenue and EPS very quickly:

I think with their competitive advantages, this will likely continue.

Now let’s dive in the top 3.

Read more

Today it’s time for another Portfolio Change.

It’s already the third one we recently made.

I believe we are increasing the quality of Our Portfolio by doing this.

Here’s an overview of the transactions:

Read more

I hope you are doing well.

Today we are going back to the roots.

We are diving into the Manifesto of Compounding Quality.

It tells you about our beliefs, values, and what we stand for.

Our Manifesto

In 2023, we already outlined the essence of our investment philosophy in our Owner’s Manual.

Here are some other relevant articles you might want to …

Read more

Today it’s time to add to Our Portfolio again.

We will add to 2 companies:

• Company 1: Undervalued by 15% according to management

• Company 2: Our Mini Berkshire Hathaway

A crazy statistic

The craziest statistic you’ll see today?

This one:

You could take away 99% of the returns of Warren Buffett…

And he would still have outperformed the market.

That’s the magic of compounding put to work.

We as human beings are not built to understand the magic of exponential growth.

It’s one of the most powerful things on earth.

You should invest in companies that create more and more shareholder value year after year.

A company like Berkshire.

But you have plenty more examples:

You only need one winner like this during your entire investing career to be really successful.

Here are 10 golden rules you can use:

1. Know what you own and why you own it. Do your homework before you buy. Buying without research is like playing poker without looking at your cards.

2. Understand the finances. The biggest losses come from weak balance sheets. Stick to profitable companies with healthy financials.

3. Use your everyday edge. You notice good businesses at work, in shops and in daily life, often before Wall Street does.

4. Buy quality, not hype. Skip hot stocks and the “next big thing.” Invest in great companies in boring industries with a durable competitive advantage.

5. Make ROIC your key metric. Return on invested capital shows how well management allocates capital. The higher, the better.

6. Think long term. In the short run, share prices and business results often diverge. Over time, the stock follows earnings: if profits grow 10x, the price will follow.

7. Let your winners run. Your downside on a stock is limited to what you invested, while your upside can be many times that.

8. Don’t overdiversify. Own only as many stocks as you can properly analyze and follow.

9. Treat market declines as opportunities. Keep some cash on the sidelines so you can buy when others panic.

10. Ignore macro forecasts and noise. Nobody can reliably predict interest rates, the economy or currencies.

You want even more rules?

Here are 20 golden investment rules from Peter Lynch:

Now let’s dive into the 2 Buys we are doing for Our Portfolio.

Read more

I hope you are doing well.

Today it’s time to dive into Our Portfolio.

What’s happening? Let’s find out right away.

What’s going on?

We’re in a very weird market today.

The market is fully driven by sentiment right now.

The only thing the market seems to care about is Artificial Intelligence.

By the way, my friend Kris recently wrote a very interesting piece about AI.

You can read it here.

Compounding Growth

Please Regulate Us!

Hi Partner 👋…

Read more

a month ago · 13 likes · 1 comment · Compounding Quality

The amount of money that is spent on AI is crazy.

The expected global spending on AI is $2.7 trillion this year and even $3.6 trillion in 2027.

If you ask me, we might have entered a dangerous place in the market.

Just look at this tweet from Jason Goepfert:

And this one:

This is a very weird, unhealthy market.

The best way to position yourself against this?

Focus even more on quality.

Companies with a:

• Healthy balance sheet

• High profitability

• Wide competitive advantage

• A lot of pricing power

Those are the companies the market turns to when things get uncertain.

Those are the companies that are very profitable and can increase their prices to offset challenging times.

Our Portfolio

Our Portfolio is currently invested in 20 high quality stocks.

As a Partner you have 24/7 access to the Portfolio and all transactions here.

The interesting thing for Our Portfolio?

It can be found when you compare the evolution of the intrinsic value with the stock prices.

If we look at the situation for 2025 for every stock, we get the following:

Read more

It’s time to wrap up serial acquirer week.

Today, it’s time for the most fun part: building a serial acquirer portfolio.

We already gave you 6 names.

Today it’s time to give you the final 6 names.

Let’s dive in right away.

Reminders

In general, there are 4 buckets for Serial Acquirers:

1. VMS Serial Acquirers

2. Swedish Serial Acquirers

3. Industrial Serial Acquirers

4. Special Serial Acquirers

We will now dive into the Industrial Serial Acquirers and Special Serial Acquirers.

Industrial Serial Acquirers

Whereas bucket 1 focused on software acquirers, we also want three serial acquirers that are focused on more industrial businesses.

The 3 names are:

1. TerraVest ($TVK)

2. Tasmea ($TEA)

3. Lindbergh ($LDB)

1. TerraVest ($TVK)

TerraVest used to be an extremely boring business.

In cold, remote areas, people often don’t have access to gas pipelines to heat their homes. Instead, they rely on propane, which is stored in large storage tanks.

These storage tanks is where TerraVest comes in.

Although propane storage is very boring, please don’t confuse that with poor returns.

Since its IPO in 2012, TerraVest has compounded shareholder returns at an incredible 31.6% CAGR by being a disciplined acquirer.

Today, TerraVest happens to be in the right place at the right time.

It is becoming a pick-and-shovel play on the AI infrastructure buildout.

Why?

Data centers consume enormous amounts of energy, mostly in the form of electricity.

But relying entirely on the grid is risky.

If the grid goes down, the data center stops running, which is very costly.

That’s why data centers typically have emergency backup generators that run on fuel.

And that fuel needs to be stored in large storage tanks.

Storing cooling water for data centers also drives storage tank demand.

That’s where TerraVest comes in.

This creates a new tailwind for a company that has already been growing very attractively:

TerraVest’s HVAC & Containment Equipment segment, which includes its storage-tank business, grew revenue by 83% YoY in the latest quarter.

Management said this growth was largely driven by the data-centre buildout.

Additional research material

If you want to learn more about TerraVest, you can learn more here:

TerraVest Investment Case

2. Tasmea ($TEA)

Australia has a population of around 28 million people.

Where it gets interesting is where these people live:

• Sydney has around 5.5 million inhabitants

• Perth has around 2.5 million

• Melbourne has around 5.5 million

• Brisbane has around 3.0 million

Subtract these four major cities, and just 11.5 million people are spread across a landmass almost as large as the United States.

And the US has more than 350 million inhabitants.

Tasmea co-founder Stephen Young made the comparison with Europe:

Australia’s low population density is a concept to understand because it’s right where Tasmea’s moat lies.

Most Australian industrials are not located in major cities like Sydney or Melbourne.

They are often in remote areas, close to the raw materials and resources that drive industries such as mining.

That is Tasmea’s hunting ground.

Large industrial facilities need to keep running. If a critical plant goes down, the cost can run into millions of dollars per day.

Tasmea acquires companies that help prevent this from happening.

In other words, it buys critical maintenance service businesses that keep essential infrastructure running.

As an example, they own a subsidiary that uses drones to inspect hard-to-reach infrastructure.

The beauty of the model is that remoteness often means less competition.

Being able to operate where others can’t go is a major competitive advantage.

As Stephen Young says:

If you look at the financials, it’s clear that this strategy is paying off:

The company also recently released its guidance, and it’s mind-blowing.

They aim to double in FY 2027.

Note that this is not all per-share value growth. Tasmea regularly issues shares to fund acquisitions (see chart above).

But it remains impressive nonetheless.

3. Lindbergh ($LDB)

Europe just had one of its hottest summers ever.

If you live in Europe, I bet during the summer you thought at least once: “I wish I had an airco.”

And Europe still has a lot of catching up to do when it comes to air conditioning.

According to The Times, only 20% of European homes have air conditioning. In the US, that number is roughly 90%.

That leaves a huge runway for growth.

The European HVAC market is expected to grow at 7.3% per year until 2035.

This creates big opportunities for companies like Lindbergh.

In 2023, Lindbergh transitioned into an Italian HVAC serial acquirer.

Since then, HVAC has become more important for Lindbergh year after year:

It now operates 13 HVAC subsidiaries, but this only looks like the tip of the iceberg.

Lindbergh has identified more than 13,000 small HVAC companies that could become potential acquisitions.

And it has some impressive shareholders backing the strategy, including Abdiel Capital and Will Thorndike’s Sun Mountain Partners.

Special Serial Acquirers

Last but not least, we identified several interesting serial acquirers that are difficult to fit into a single bucket.

We therefore placed them in a catch-all category we call “Special Serial Acquirers.”

The names are:

Read more

It’s time to wrap up serial acquirer week.

Today, it’s time for the most fun part: building a serial acquirer portfolio.

We found 12 very exciting names.

On average, these names compounded shareholder returns at +34% per year!

Let’s dive in right away.

Before we start

Before we start, it helps to structure the portfolio in 4 buckets.

Each bucket consists of 3 serial acquirers. That way, we have a portfolio of 12 names.

There are the buckets we will use:

1. VMS Serial Acquirers

2. Swedish Serial Acquirers

3. Industrial Serial Acquirers

4. Special Serial Acquirers

Bucket 1: VMS Serial Acquirers

Vertical Market Software (VMS) is software for very specific needs.

Think about software that runs libraries, golf clubs, or … chicken coops.

This model makes a lot of sense for Vertical Market Software businesses.

Why? Let’s say you have a chicken coop software company that counts eggs.

It sounds strange, but Constellation ($CSU) actually owns such a business.

Chicken coop software companies are great:

• Not a single MIT student is thinking about disrupting it

• Competition is very limited

• It’s mission-critical

• It generates strong, recurring cash flows

Yet, chicken coop software companies face one major disadvantage: there is limited runway to reinvest.

That’s exactly why it makes sense to build a serial acquirer above these businesses.

You get to own these wonderful businesses, while M&A gives you room to reinvest.

Let’s add three businesses to the portfolio that use the VMS Serial Acquirer:

1. Sygnity ($SGN)

2. Chapters Group ($CHG)

3. Software Circle ($SFT)

1. Sygnity ($SGN)

There are five public companies from the Constellation universe:

• Constellation Software itself

• Topicus

• Lumine

• Asseco Poland

• Sygnity

Out of these five, Sygnity had the best H1 2026 results:

• H1 2026 revenue growth of +47%

• H1 2026 EBITDA growth of +74%

Despite these impressive results, the valuation remains very cheap at a Forward EV/EBITDA below 12x.

The reason for this low valuation?

The low public float plays a big role.

Topicus alone already owns 72.7%. The public float is probably around 10%.

This makes it impossible for larger investors to open a position.

Sygnity is also the only company in the Constellation universe that hasn’t recovered from AI fears yet:

Implementation of the Topicus playbook

It’s worth taking a closer look at what Topicus has done at Sygnity.

You often see Constellation and Topicus being described as “capital allocation machines”.

In my opinion, this sells them short.

They are not only exceptional capital allocators but also highly talented operators.

The Sygnity transformation proves this.

Just look at this visual below.

Topicus transformed a melting ice cube into a business compounding at +15%:

How did Topicus do this?

VMS is typically mission-critical but costs less than 1% of customers’ total revenues.

This gives these companies significant pricing power.

Second, Topicus gave Sygnity access to its database of potential acquisition targets.

This has already helped Sygnity close four VMS acquisitions since February 2024.

Finally, Topicus installed its ROIC-based incentive structure and brought in a Topicus-like CEO: Maciej Różycki.

He previously spent over six years at Total Specific Solutions (TSS) as a portfolio manager.

We are very happy to own Sygnity through Topicus.

2. Chapters Group ($CHG)

What happens when you give a large cash pile to a young, ambitious Buffett disciple?

A 15-bagger in 8 years.

At least, that’s what the history of Chapters ($CHG) suggests.

Chapters’ CEO Jan Mohr was 11 years old (!) when he read his first Buffett biography.

At the age of 25, he was already running his own equity fund.

It was during his time as a fund manager that he came across a business called Medical Columbus.

Medical Columbus had just sold its strategic assets to a private equity firm when Mohr investigated the business.

What was left was a public company sitting on a large cash pile.

That’s when Jan Mohr saw an opportunity to build his own holding.

Eventually, he took control of the business.

At the end of 2018, they closed their first acquisition.

Since then, the share price has compounded at a +40% CAGR:

Chapters now owns over 60 VMS businesses across 8 acquisition platforms.

For a company with a €1 billion market cap, Chapters also has an unusually strong shareholder base.

Mitch Rales owns 15.1% and speaks with Jan Mohr every week.

Rales co-founded Danaher Corporation with his brother. Danaher has since become a 350-bagger.

And there’s another fun story.

Daniel Ek, the founder of Spotify, was listening to a podcast featuring Jan Mohr.

The story goes that Ek picked up the phone as soon as the podcast ended and became a large Chapters shareholder.

Today, he owns 12.7% of the company.

3. Software Circle ($SFT)

Mark Leonard (Constellation Software) once wrote the following in one of his shareholder letters:

One tiny UK-listed company took that advice seriously. I’m talking about Software Circle ($SFT).

A few years ago, Software Circle was still known as Grafenia, a struggling printing software business.

But some investors saw something different. They saw a cheap, publicly listed software company that could serve as a platform for acquisitions.

Today, Software Circle is a thriving VMS serial acquirer.

They have acquired 11 businesses in the UK and Ireland over the past five years.

Since the transition, the share price has risen from a low of £0.04 to a peak of £0.31.

It has since fallen roughly 50% to around £0.16, largely due to concerns about AI disruption.

We believe the company is valued too cheap right now.

Here’s a quick financial snapshot of the business:

• The five-year Revenue CAGR is 26.2% (important: revenue per share growth was actually negative during this period)

• Free Cash Flow went from -£1.5 million in 2020 to +£5.9 million in 2025.

• Organic revenue growth of acquired companies was +7% in 2025. This is a very strong number. It shows that they are good operators:

• Total Shares Outstanding also exploded as they raised fresh equity to fund acquisitions.

It looks like Software Circle is now switching from equity financing to using debt and internal cash flow.

Free Cash Flow in 2025 was £5.9 million, and they recently opened a £25 million credit line.

This should give them enough dry powder for M&A without needing further dilution.

Software Circle also has an excellent shareholder base:

• P&R Real Value (owns 12.7%) is an excellent serial acquirer investment fund led by Matthias Riechert

• Sun Mountain Partners (owns 10.3%) is the investment vehicle of Will Thorndike, author of The Outsiders

• Chapters Group (owns 9.8%): Jan Mohr also saw the transformation and invested

Another strength is their impressive Board of Directors.

Marc Maurer, COO of Chapters, sits on Software Circle’s Board.

Brad Ormsby, the CFO of Judges Scientific, is another Board Director at Software Circle.

Bucket 2: Swedish Serial Acquirers

You can’t build a serial acquirer portfolio without looking at Sweden.

Much like Silicon Valley is the home of tech, Sweden is the home of serial acquirers.

Most of the best-performing Swedish businesses also use the serial acquisition model:

To honor that legacy, we add three Swedish serial acquirers to the model portfolio.

Each of them has its headquarters in Stockholm and primarily acquires businesses in the Nordics.

Here are the names:

Read more

Earlier this week, we looked at what serial acquirers are and why they are interesting.

Today, it’s time for the second article.

You will learn how to identify the best serial acquirers yourself in less than 5 minutes.

Ready. Set. Go!

Invert, always invert

There are probably over 300 public companies that you could label as serial acquirers.

In Sweden alone, you can already find more than 30 of them.

No investor has time to analyze them all.

It’s exactly why your job as an investor is to say no as soon as possible.

The sooner you have found a reason not to invest, the better.

This will give you more time to dive deep in the best ones.

Instead of looking at a “what to look for list” in serial acquirers.

You are going to apply Charlie Munger’s advice: “Invert, always invert”.

Let’s look at a “what to avoid list” for serial acquirers.

Using this checklist, you can say no to 90% of public serial acquirers in just a handful of minutes.

What remains are the good serial acquirers.

Here is the checklist with five reasons to say a quick no:

1. The dividend payout ratio is too high

2. Excessive use of debt

3. Organic growth is poor

4. They do few, large deals

5. Too many people at HQ

Let’s now go a little bit deeper into why they are so important.

1. Dividend Payout Ratio is too high

If you are looking at serial acquirers, it helps to substitute the word “dividends” with “leakage”.

At least, that’s the advice of REQ Capital.

REQ Capital is a Norwegian investment firm focused exclusively on serial acquirers.

They wrote a phenomenal 300+ page deep dive on this subject.

One of their most important charts? The one below:

It shows what P/E multiple you can pay to earn a market-like return over 20 years.

This based on the company’s Return on Equity (ROE) and Reinvestment Rate.

Let’s take two examples.

The P/E multiple you can pay for company 1 to earn a market-like return? 27x.

And for company 2? 188x!

This shows the importance of having a high Reinvestment Ratio.

At the same time, you want to avoid serial acquirers with high Dividend Payout Ratios.

The Reinvestment Rate and Dividend Payout Ratio are linked:

In practice, it shouldn’t take more than 30 seconds to test this.

Just go to Fiscal.ai and plot two things:

1. “Dividends Paid”

2. “Payments for Business Acquisitions”.

You can find them under “Cash Flow Statement”.

Below is what it looks like for Constellation.

It clearly spends much more on acquisitions (blue) than on dividends (yellow).

That’s what you want to see. The inverse would be a red flag.

2. Excessive use of debt

You can think of serial acquirers as public funds that you invest in.

The only difference? You should substitute “CAGR since inception” and “Assets under Management” with “return since IPO” and “acquisition capital deployed”.

And just like funds, the most interesting time to acquire/invest is often when blood is running down the streets.

A good example of this is what Constellation Software did during the Great Financial Crisis of 2008-2009.

As you can see below, they ramped up acquisitions and had some of their best years ever.

Mark Leonard (former Constellation CEO) later reflected, saying:

In The Outsiders, Will Thorndike also shares this same pattern with two of the best serial acquisition entrepreneurs: John Malone and Warren Buffett.

Just like Leonard, they were incredibly active during the 2008-2009 period.

Something Leonard, Buffett, and Malone had in common?

Healthy balance sheets.

It allowed them to, as Buffett would say, “be greedy when others are fearful”.

This is exactly the reason why you should avoid serial acquirers with excessive debt.

At times when it’s most interesting to ramp up acquisitions, they are frozen because they already carry too much debt.

You should always remember the 3 C’s:

This rule of thumb is just as true for a serial acquirer as it is for you as an investor.

Many serial acquirers have the courage during a crisis, but they don’t have the cash because of their weak Balance Sheet.

Leonard, Malone, and Buffett did.

Case study: TransDigm ($TDG)

Internally, we have been discussing TransDigm recently (click for an extensive investment case).

We were seriously considering them as a potential addition to Our Portfolio.

Why? It’s probably one of the highest-quality serial acquirers that keeps generating shareholder value:

But the combination of large dividends and excessive debt made TransDigm an easy no for us.

Just take a look at this chart:

How should you read this chart?

• Blue bars show Net Debt Issuance: the difference between the debt TransDigm adds to its balance sheet and the debt it repays. A positive number means TransDigm is taking on more debt than it is paying back.

• Orange bars show dividend payments

In other words, TransDigm has recently taken on a significant amount of debt to fund a large special dividend.

If you buy TransDigm today, you don’t get the benefit of that dividend. But you do have to live with the debt that funded it and the large interest expenses.

Net Debt/EBITDA currently stands at 6.0x.

Interest expense was almost 40% of EBITDA in the latest quarter.

This leaves very little EBITDA converting into Free Cash Flow.

As a result, Net Debt/FCF is now above 16x!

In addition, TransDigm may have the courage to act during a crisis, but it doesn’t have the cash to “be greedy when others are fearful.”

Constellation and Topicus do.

As phenomenal as TransDigm is, it was a quick no for us.

Again, investing means saying no as soon as possible.

3. Organic growth is poor

In his H1 2026 review, Matthias Riechert said something really important about serial acquirers.

For those unaware, Riechert is a great serial acquirer investor.

Here is what he had to say:

What did he mean by this? Closing the acquisition is the easy part.

The hard part is actually improving acquired businesses. That’s where most of the value is created.

A quick checkup to see how acquired businesses are performing is to look at organic growth.

In an ideal world, you only want to invest in serial acquirers where the organic growth rate is consistently above the inflation rate.

Aim for acquirers that post 2-5% organic growth annually (or higher).

As an example, here is what Topicus’ organic growth looks like:

You don’t fall off your chair seeing these organic growth rates.

But more importantly, Topicus never has terrible years regarding organic growth.

It’s consistently in the 2-5% range (or higher).

That’s exactly what you want to see.

4. They do few, large deals

It’s time to look at some research on serial acquirers.

The next two charts are incredibly important.

Charts 1 and 2 plot ROIC (and organic growth) on the Y-axis relative to capital deployed on acquisitions on the X-axis.

And there seems to be a very clear pattern: the more capital serial acquirers deploy, the lower the ROIC and organic growth become.

Chart 2 also shows one clear outlier: Constellation Software ($CSU). It keeps generating a high ROIC as it scales.

Why is that? Let’s look at Chart 3.

It shows the average deal size. And again, Constellation stands out.

As Constellation has grown, it has continued to make more acquisitions each year without increasing the average deal size too much.

A year with 100+ acquisitions isn’t abnormal for Constellation. Think about this: almost one out of three days, they close an acquisition.

That’s very different from other large serial acquirers. As they scale, they don’t do more acquisitions. They simply make larger acquisitions.

And larger acquisitions typically generate poorer returns. As the rule of thumb in M&A goes:

Interestingly, McKinsey found the same pattern in an incredible research piece on M&A.

As you can see below, programmatic M&A tends to generate the highest returns:

In other words, this was their key finding:

Read more

It’s a special week today.

Why? It’s Serial Acquirer Week.

In three articles, you’ll learn everything you need to know about serial acquirers.

Here’s what to expect:

• Article 1 (today): What are serial acquirers? And why are they interesting?

• Article 2: A handy toolkit to find the best serial acquirers in the world

• Article 3: A model portfolio co…

Read more

I hope you are doing well.

Today it’s time for another position switch in Our Portfolio:

• We are selling one company

• We are using the proceeds to add to two positions

Optimizing the Portfolio

The goal of Our Portfolio?

Having a portfolio we can be proud of.

Your portfolio should reflect your personality.
You should own companies that let you sleep well at night.

As a reminder, all Partners have access to Our Portfolio here.

The current CAGR since inception in October 2023 is unsatisfactory.

There is only one thing I can thing I can say about this: this return is way too low.

It’s bad. There are no excuses.

We should do better.

And you deserve better as a reader of Compounding Quality.

The entire Quality Investing style is in a selloff right now:

Here are some of the YTD returns of some of the best quality investors in the world:

• Chuck Akre: -16%

• Dev Kantesaria: -23%

• Bill Ackman: -25%

The average stock in Our Portfolio is down 12.7%.

In the meantime, my estimates indicate the intrinsic value went up by +11.1%.

I want to truly apologize to you as a Partner.

Times like this truly define you as an investor.

Times like this oblige you to think as a business owner and not as an investor.

Personally, I don’t feel worried about our performance.

I know the strategy works and should do well in the long term.

But I do feel bad for you as a Partner and all other Partners.

Especially for those who now consider switching to another strategy (or switch to passive investing).

It might be exactly the wrong time to do this today.

Just look at this chart:

The S&P 500 is reaching new highs and at the same time there are more stocks trading at lows than highs.

This is a very uncommon situation.

It usually happens when the market is reaching the top.

Yesterday, I received an email from someone who was considering joining Compounding Quality.

He asked me which return I expected going forward.

I told him the goal (as outlined in the Owner’s Manual in 2023), is to outperform the S&P 500 by 3% per year in the long term.

As the S&P 500 averages around 9% per year, you know our goal is to achieve a yearly return of 12% per year.

The answer of this reader?

Expecting a return of over 100% per year?

Greed is a strange beast.

It tells you something about the kind of market we are in today.

The entire market is momentum driven:

The last time quality underperformed the market by so much as today?

1999.

The good news?

Quality is set for a good performance going forward.

Our Portfolio Fundamentals look as follows:

Here’s the evolution of the Free Cash Flow:

The expectations going forward look as follows:

And the valuation? We’re at the cheapest valuation level ever (FCF Yield: 6.3%):

Let’s now dive into the Portfolio Update.

Here are the buy and sell decisions we’re making today:

Read more

We want to buy companies that are:

1. High quality

2. Very profitable

3. Trading at an attractive valuation

Let’s dive into Our ETF Portfolio today and add to our portfolio.

Value Investing 101

Warren Buffett’s mentor? Ben Graham.

Ben Graham is the father of value investing.

His investment philosophy was s…

Read more

He returned 12.6% per year to shareholders since 2009.

Let’s dive into the lessons and philosophy of this legendary investor.

Who is Chuck Akre?

Chuck Akre is a highly respected investor known for his disciplined approach and long-term mindset.

People often refer to him as one of the best quality investors in the world.

…

Read more

I hope you are doing well.

Today, we are adding more to an existing stock in Our Portfolio.

As a reminder, you can find the entire portfolio, including all transactions here.

Performance

In the Community, some Partners ask questions about the performance of the Portfolio.

You can see all positions + all transactions in Our Portfolio Spreadsheet.

Read more

It’s time to update our watchlist today.

The Buy-Hold-Sell List helps you track Our Investable Universe.

Are there some attractive companies available today? Let’s find out.

Subscribe now

Crazy Mr. Market

Have you ever noticed how quickly Wall Street can go from loving a business to writing it off…

And then change its mind?

Earlier this year, Wall Street decid…

Read more

He was a legendary Indian investor.

His track record? A 62% (!) CAGR over 37 years.

Let’s see what you can learn from him.

Who was Rakesh Jhunjhunwala?

Rakesh Jhunjhunwala was an iconic Indian billionaire investor, trader, and chartered accountant.

He was known as “The Big Bull of India”.

Some…

Read more

On Tuesday, September 29, I’m hosting a FREE masterclass where I’ll show you exactly how to find the best companies in the world.

It’s a live webinar for one hour. It’s 100% free and there’s a Q&A at the end where I’ll stay until all your questions have been answered.

You can register here.

In the entire world, there are more than 50,000 public companies.

This means you face two problems:

1. You can’t analyze them all

2. You only want to own the best of the best

Today we are using a stock screener (which you can use too) to find some of the best companies in the world.

Subscribe now

A stock screener?

You can think of a stock screener as a set of filters.

You start with a big list of stocks.

Each criteria is a filter that removes part of the bad companies.

Every step makes the list of possible investments smaller.

Only a few companies will make it through every single filter.

Safal Niveshak beautifully visualized this:

Let’s build a stock screener together which helps you to find good companies.

For years I’ve written about the companies I own.

What I’ve never done is walk anyone through the process: the actual sequence I run every business through before a single dollar goes in.

On Tuesday, September 29 I’m doing exactly that, live, for one hour. Free, and there’s live Q&A at the end where I’ll stay until the questions run out.

Here’s what you’ll learn:

• The six things I check before I buy

• The order I check them in

• The three kinds of business I keep coming back to

• Why most professional fund managers don’t beat the index they’re paid to beat and what I do instead

• The mistake that cost me 60% on my very first stock

You want to attend? It’s free:

Save your seat

Your Screening Criteria

Here are the criteria we will use:

Let’s first help you understand why each of these metrics is important.

Revenue Growth (5-year Average > 5%)

In the long term, revenue growth is the main driver for stock market returns.

Why?

Because without top-line growth, a company can’t grow its earnings or free cash flow at an attractive rate in the long term.

Diluted EPS Growth (5-year Average > 7%)

A company can grow its profits without making you richer.

How?

By issuing more shares.

That’s why we focus on diluted EPS. It measures earnings on a per-share basis and accounts for potential dilution from things like:

• Stock-based compensation

• Convertible bonds

• Etc.

We want our share of the profits to grow, not just the company’s total profits.

Gross Margin (5-year Average > 40%)

High gross margins are a good sign that the company has pricing power.

It means people are willing to pay much more than it costs to make the product.

Net Margin (5-year Average > 10%)

The higher the profitability, the better.

You want the Net Margin to be higher than 10%.

A higher net margin helps companies to do well during tough times.

And in the long term, stock prices follow the evolution of earnings growth:

Free Cash Flow Margin (3-year Average > 10%)

Earnings are an opinion. Cash flow is a fact.

The Free Cash Flow Margin shows how much of each dollar in sales is translated into pure cash.

We want this number to be higher than 10%.

Low capital intensity (CAPEX / Revenue < 5%)

You want to buy companies that don’t need a lot of capital to run.

Why?

Heavy physical costs like factories or machinery can eat up all the profits.

That’s exactly why you want to own capital light businesses.

They tend to outperform in the long term:

Great capital allocation

Capital allocation is the most important task of management.

It’s the decision management makes about what to do with the money it earns.

In general, a company has 4 capital allocation options:

1. Organic growth

2. Strengthen the balance sheet

3. M&A

4. Return capital to shareholders (dividends and/or share buybacks)

If you want to learn more, you can read this article.

We use two criteria to screen for great capital allocators.

1. ROIC (3-year Average > 15%)

ROIC measures how efficiently a company translates the capital it has raised (equity + debt) into operating profit.

You want this number to be higher than 15%.

Why? Because the ROIC has to be higher than the WACC (cost of capital).

When this wouldn’t be the case, a company is destroying shareholder value by reinvesting in itself.

2. ROCE (3-year Average > 20%)

ROCE is a similar metric as ROIC.

You want this number to be higher than 20%.

The difference between ROIC and ROCE (and ROE)?

You can find it here:

The results

Now let’s put all these criteria into a screener on Fiscal.ai.

A great thing about Fiscal?

You can exclude countries.

In our example, we excluded China.
We also excluded industries like banks.

China is way outside our circle of competence.

And the banks are a very specialized industry that use different metrics than the ones we’re looking at here.

Out of 50,000+ companies, this screen found fewer than 100 worth a closer look.

Revenue Growth

Here are some companies that have high revenue growth and match all criteria:

• Nvidia: +69.1%

• DLocal: +52.4%

• Arista Networks: +32.0%

EPS Growth

Here are some companies that matched all criteria with that have high EPS growth:

• AppLovin: +98.3%

• PDD Holdings: +95.1%

• Exelixis: +61.2%

High ROIC

Here are some companies from the screener with a high ROIC:

• Rightmove: 363.5%

• Games Workshop: 84.9%

• Deckers Outdoors: 76%

Download the Screener Results

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