Over the past few weeks, we’ve been giving you an extensive Portfolio Update.

In case you missed it:

• Portfolio Update April 2026 (Part I)

• Portfolio Update April 2026 (Part II)

• Our Shopping List (Part I)

• Our Shopping List (Part II)

• Our Shopping List (Part III)

You know everything about our portfolio as well as the companies we might consider adding.

But how will the portfolio evolve from here?
How will we move forward?

Let’s find out.

The best of the best

Our investable universe consists of 153 stocks.

That’s 0.4% of the 40,000+ publicly traded stocks worldwide.

Only the best of the best is good enough for us.

We will continue to relentlessly track the underlying performance of our portfolio.

Why?

Stock prices always follow the evolution of the intrinsic value over time.

The intrinsic value is mainly driven by the EPS and Free Cash Flow Per Share growth.

But in the short run, stock prices and fundamentals can diverge a lot.

While this can be painful at the time, it’s also what creates big opportunities.

Warren Buffett says that’s what made him rich.

Today is such a time if you ask me.

It’s why we only worry about stock prices when we’re looking to buy or sell.

In the meantime, we focus on the underlying fundamental performance.

Here are the most important metrics to watch.

1. The evolution of the Free Cash Flow of Our Portfolio

2. Our Portfolio Fundamentals

3. Growth of the Owner’s Earnings

One thing I noticed as I was thinking about Our Portfolio?

Every single time I bought a company not because I thought it was the highest quality, but because it was cheap, it ended up being a mistake (so far).

Think about:

• Text SA

• OTC Markets

• Novo Nordisk

• …

A game of opportunity costs

While I believe that the companies we currently own will do fine in the long run, a lot of Quality companies are on sale right now.

We need to invest in the companies with the most upside potential according to us.

If we find better companies with greater upside potential, we should consider switching.

A great test to know if we own Quality companies?

Warren Buffett’s 10 year test:

We need to be willing to own every single stock within our portfolio if the market would close for 10 years.

Going Forward

Going forward, we’re raising the bar.

We’ll focus on buying even higher-quality businesses.

Because not all growth is created equal.

Think about it this way.

Let’s imagine two companies both grow their earnings at 10% per year.

• Company A: steady and reliable (year after year)

• Company B: Volatile… +30% one year, -15% the next, +20% the year after

Is Company A or B the most valuable?

It’s always Company A.

The linearity of growth matters a lot.

Here’s what we look for:

• Consistent revenue growth, not boom-and-bust cycles

• Earnings that compound smoothly over time

• A business model that is resilient

We want to find companies so predictable and durable that they keep compounding for decades.

The most serious candidates to be added to the portfolio fit this description.

Sell Candidates

The most serious candidates to consider selling are the ones we might not want to own if the stock market closes for 10 years tomorrow.

We did the exercise for our entire portfolio:

Read more

Over the past few weeks, we’ve been giving you an extensive Portfolio Update.

In case you missed it:

• Portfolio Update April 2026 (Part I)

• Portfolio Update April 2026 (Part II)

• Our Shopping List (Part I)

• Our Shopping List (Part II)

Subscribe now

Let’s dive in the final part of Our Shopping List today!

Investor AB ($INVE-B)

How does the company make money?

Investor AB is the Wallenberg family’s listed holding company.

That means it combines two interesting things:

1. A holding company, a type of asset that often trades at a discount to the assets it owns

2. A family owned business, meaning there’s a lot of skin in the game

Investor AB owns significant stakes in Sweden’s industrial champions like Atlas Copco, ABB, and AstraZeneca.

They focus on long-term ownership, active board engagement, and capital allocation across listed and unlisted assets, funded by dividends and occasional asset sales.

Why is it an interesting company?

• The best of Europe in a single share: Buying Investor AB gives you exposure to a pre-built collection of world-class companies like AstraZeneca (medicine), Atlas Copco (industrial tools), and ABB (robotics). It is effectively a curated fund run by one of the most proven families in European business.

• Wonderful companies at a fair price The stock trades near its intrinsic value

• An amazing track record: Over the past decade, earnings have grown by nearly 25% per year. The stock has nearly doubled over the past five years. Plus, they pay a growing dividend that has never been cut.

• Solid balance sheet: The company has very little debt. That means they aren’t just safe during a market crash, they actually have the cash to go shopping for more companies when prices are low.

• The main risk is market exposure: Roughly 70% of the portfolio consists of publicly traded securities. When global markets sell off, Investor AB’s net asset value will decline with them. It’s a great long-term bet, but you should expect some volatility along the way.

At which price are we interested?

Like most holding companies, Investor AB frequently trades at a discount to the underlying value of its assets.

I think it starts to get interesting at a P/B ratio of 0.9x.

That implies a stock price of around 281 SEK (current stock price: 372 SEK).

KKR ($KKR)

How does the company make money?

KKR is an American private equity company.

They use money from big clients (like pension funds) to buy and grow other companies, invest in infrastructure and private credit.

They earn recurring fees on the assets they have under management, as well as performance fees (typically around 20%) when they sell an investment for a profit.

Why is it an interesting company?

• Strong track record: KKR manages $744 billion across private equity, real estate, infrastructure, and credit. They’ve been doing this since 1976 and are one of the best in the world at it.

• Permanent capital: KKR bought Global Atlantic, a life insurer, giving them $321 billion in permanent capital, money that never leaves. They use it to fund their own deals, meaning they can invest without outside money and keep all the profit.

• Locked in profits: Most KKR funds have lockup periods of 7-12 years. That means 92% of their AUM is basically locked in. This gives them stable fees and they don’t have to worry about investors panicking and pulling their money out during a market crash.

• Massive growth: In 2025, they raised $129 billion in new investment capital. They expect to continue raising over $115 billion every single year, proving that big investors still trust them with their cash.

• The stock is on sale: The stock is down nearly 21% this year due to fears around private credit. But KKR’s actual direct lending exposure is just 21% of assets. This looks like an overreaction and a potential opportunity.

At which price are we interested?

KKR is currently trading near its average Forward P/E over the past decade.

I would say KKR is at or very near an interesting price to buy.

Insiders seem to agree as they have been buying as of late.

Lifco ($LIFCO-B)

How does the company make money?

Lifco is a Swedish serial acquirer focused on small, niche businesses in dental supplies, demolition tools, and systems solutions.

It buys the #1 or #2 company in these small markets, holds them for the long term, and makes them more valuable by improving their operations and buying complimentary companies.

It’s a page right out of Constellation Software’s playbook.

Why is it an interesting company?

• It’s the Swedish Constellation Software: Lifco acquires small, profitable niche businesses and lets them run independently. The decentralized model works. Revenue has grown at more than 13% every year for a decades, and EPS has grown even faster at more than 16% every single year.

• It’s got a strong moat: Lifco targets tiny market leaders in specialized niches. Think dental implant systems where switching costs are high, or demolition robots where they set the standard. These companies are too small for larger players to even look at.

• The price is getting interesting: Lifco is back to prices we haven’t seen since 2024. It’s not an obvious bargain, but companies of this quality rarely are.

• The balance sheet is solid: Interest coverage sits at 10.0x and debt-to-equity at 0.3x. That means they have a solid foundation to keep buying companies.

• Serious skin in the game: Carl Bennet owns 50% of the company. The chairman has over half his wealth tied to Lifco’s success. That means the people leading the company are incentivized to make sure you succeed along with them.

At which price are we interested?

Lifco is never a cheap company.

Since 2020, the cheapest it’s gotten was a Forward P/E of 20x.

We’d love to have another opportunity to buy it at that valuation.

That implies a stock price of 191 SEK (current stock price: 304 SEK).

Now let’s dive into the final companies.

Read more

Over the past few weeks, we’ve been giving you an extensive Portfolio Update.

In case you missed it:

• Portfolio Update April 2026 (Part I)

• Portfolio Update April 2026 (Part II)

• Our Shopping List (Part I)

For every company in the Portfolio, you found out about our conviction levels.

And you’ve also found out about opportunity costs.

When you find a company with a higher expected return than one you’re currently invested in, you should consider making the switch.

Let’s dive into the companies we’re considering adding to the portfolio.

Our Shopping List: Part 2

Fairfax Financial Holdings ($FFH)

How does the company make money?

Faifax Financial Holdings is a holding company.

It’s a Canadian company operating a collection of global insurance and reinsurance businesses, collecting premiums upfront and investing the float before claims are paid.

The CEO Prem Watsa takes an opportunistic, value-oriented approach to investing the float, adding a second engine of returns alongside underwriting profit.

The goal of the company is to grow its book value by 15% per year on average in the long term.

In essence, Fairfax copied the business model of Berkshire Hathaway.

I’m currently reading the book The Fairfax Way. It’s a must read.

Why is it an interesting company?

• The man who made $3 billion from a single bet: Prem Watsa, Fairfax’s CEO, called the 2008 financial crisis before almost anyone. He runs this company like his personal investment fund; with deep conviction and zero interest in short-term noise.

• Two ways to make money at the same time: Fairfax earns on insurance premiums and on its investments simultaneously. When both engines fire together, the returns can be very powerful.

• Growing in places most competitors ignore: Around 25% of Fairfax’s business comes from faster-growing markets outside North America (like India). That’s a growth lever most insurance peers simply don’t have.

• A great business at a cheap price: Fairfax has compounded book value at 12% per year for over a decade. The stock trades at just 8x earnings. You’re not paying much for something that has consistently delivered.

• The CEO hasn’t given himself a raise in 25 years: Watsa has kept his salary at CAD 600,000 since 2000. He’s not here for the paycheck. He owns the stock. His interests and yours are exactly the same.

At which price are we interested?

Fairfax is an amazing business.

Just look at how the intrinsic value evolved over the years (the stock price followed):

The company massively outperformed over the past 40 years:

In general, it’s quite hard to value Fairfax Holdings.

You should make an estimate of its intrinsic value.

I would be interested in owning Fairfax at 1.2x book value.

This implies a stock price of 1,777.5 CAD (current stock price: 2.472 CAD).

Fortinet ($FTNT)

How does the company make money?

Fortinet is a cybersecurity company.

They sell network security hardware (firewalls) as an entry point. Afterwards, they make high-margin recurring revenue through software subscriptions and support contracts.

Fortinet has a strong vertically integrated model. This gives them a clear cost and performance advantage.

Why is it an interesting company?

• Cybersecurity spending only goes up: Hackers get smarter every year. Fines get bigger. Fortinet’s products stop being a nice-to-have and become a must-have.

• Once you’re in, you don’t leave: Switching means retraining your team, ripping out systems, and leaving yourself wide open to attacks in the process. As a result customers stay.

• The more customers they have, the better the product gets: Fortinet collects live threat data from 800,000+ customers. More data means faster detection. Faster detection attracts more customers. The flywheel keeps spinning.

• Two new growth engines are just getting started: SASE and SecOps now make up 38% of billings and are growing by 40% per year. They are sold directly to existing customers at almost no extra cost.

• The business gets more profitable every single year: More software, less hardware. Operating margins are expected to climb from 30% today to 36% by 2030. Same revenue base, more profit flowing through.

At which price are we interested?

Fortinet currently trades at a Forward PE of 29.2x.

Stock Based Compensation equals 15% of Fortinet’s Net Income.

If we adjust for this, the adjusted Forward PE equals 33.6x.

We would love to own Fortinet at 25x their adjusted Forward PE.

This implies a target price of $65.7 (current stock price: $85.1).

Heico ($HEI)

How does the company make money?

Heico produces FAA-approved aircraft replacement parts at meaningfully lower prices than original equipment manufacturers.

This saves airlines and MRO shops significant cost.

It also runs a repair and overhaul segment, and grows steadily through disciplined bolt-on acquisitions of niche aerospace businesses.

Why is it an interesting company?

• They sell the exact same airplane parts for 30-40% less: Airlines have to maintain their planes no matter what. Heico reverse-engineers the exact same parts, gets approval, and undercuts the original manufacturers on price.

• Getting in the industry is nearly impossible: Years of regulatory approvals, millions in R&D, hundreds of certified parts just to be a viable alternative. Heico already has all of that. New competitors start from zero.

• Once Heico is in, nobody switches: Airlines can’t gamble on untested parts. Heico has a 30-year record of zero in-flight part failures. That track record is priceless and nearly impossible to replicate.

• Defense is a whole second business: Heico’s components sit inside targeting systems, satellites, and missile guidance systems. When you’re that deeply embedded in critical defense hardware, nobody swaps you out for a cheaper option.

• The numbers keep getting better: 14% revenue growth and 15% operating profit growth last quarter. Older planes are flying more than ever, and original manufacturers keep raising prices, which only makes Heico’s discount more attractive every year.

At which price are we interested?

Heico is an amazing company that has always been expensive/

They currently trade at a Forward PE of 46.7x.

I would only be willing to pay 30x earnings for Heico.

This means we’re interested at a price of $178 (current stock price: $270).

Now let’s dive into the final 4 companies.

Read more

I hope you are doing well.

Today, I am doing something I usually don’t do.

A few weeks ago I met Nate Tucci.

He’s an amazing guy.

I’ve never met anyone who is so experienced in options as Nate is.

That’s why I asked him to do something special.

I asked him to give a webinar for readers of Compounding Quality.

The good news? He said yes!
The even better news? It’s free!

Here’s everything you need to know:

📅 When: Monday, April 27th at 12:00 PM ET (6:00 PM CET)
⏱️ Duration: 60 minutes
💻 Where: Online
🎉 Price: Free!

You can register here:

Register for the webinar

Everything in life compounds
Team Compounding Quality

Disclaimer

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

Last week, you got an extensive Portfolio Update.

In case you missed it:

• Portfolio Update April 2026 (Part I)

• Portfolio Update April 2026 (Part II)

For every company in the Portfolio, you found out about our conviction levels.

Investing is an intellectual game that never stops.

And it’s also a game of opportunity costs.

What do I mean by this?

If you are invested in a company where you believe the future expected return equals 8% per year…

… And you find another one with an expected return of 13% per year…

You should consider making the switch.

That’s exactly why we’ll dive in some companies we’re considering adding to the portfolio this week.

Ready. Set. Go!

Companies we’re considering adding

Let’s now go over a list of companies we’re considering for the Portfolio.

3i Group ($LON:III)

How does the company make money?

3i Group is a Private Equity company/holding. They make money by buying stakes in private companies, growing their value, and selling them for a profit.

Their largest stake? Action.

Action is an European discount retailers that is growing at very attractive rates:

Why is it an interesting company?

Here’s why 3i Group is interesting in 5 bullet points:

• Action exposure: ~90% of 3i’s private equity returns come from Action. Action is the fastest-growing non-food discount retailer in Europe (Revenue CAGR since 2011: 26%)

• Exceptional unit economics: Action earns back the ~€500k it spends to open a store in less than a year. This helps them pay for new stores on its own, opening about one new store every day.

• Massive runway left: Many places in Europe don’t have many Action stores yet, and some countries (like the UK and Scandinavia) don’t have any at all.

• Wide moat: Because Action is so big, it can sell things cheaper than others. People tell their friends about the low prices, so it grows without spending money on ads. This creates a simple cycle where being bigger helps it stay cheap and to keep growing.

• Strong management alignment: CEO Simon Borrows owns over £585 million in 3i shares (865× his base salary), keeping incentives firmly aligned with shareholders.

At which price are we interested?

At the end of 2025, the NAV (intrinsic value) of 3i Group equaled 3,017 pence.

The current stock price equals 2,859 pence.

This means the company now trades at a small discount.

Buying 3i Group at a discount compared to its NAV is never a bad idea if you ask me.

Adyen ($ADYEN)

How does the company make money?

Adyen processes payments between merchants, card networks, and banks through a single unified platform, taking a small percentage or fee on every transaction.

Its edge is cutting out intermediaries, offering a one-stop solution globally, which attracts large enterprise clients and drives high-margin volume growth.

As you can see in this chart, Adyen simplifies the electronic payments value chain:

Why is it an interesting company?

Here’s why Adyen is interesting in 5 bullet points:

• Boring management in the best way: Management doesn’t focus on M&A. The company grows organically and stays focused.

• Economies of scale: Every payment teaches Adyen to catch fraud and approve more transactions. More customers → better data → better results → even more customers.

• Technological advantage: Rivals are combining old technology together. Adyen built everything clean from day one on one platform.

• Way more than just payments: Started as a payment processor, now quietly running companies’ entire financial back office.

• Online + in-store in just one system: Big retailers hate juggling separate systems. Adyen handles both, so customers naturally spend more over time.

At which price are we interested?

Adyen now trades at its cheapest valuation level ever (a FWD PE of 25.3x).

At a PE of 20.0x, the company could be a no-brainer.

This means we’re willing to pay €765 for Adyen (current stock price: €970).

Alphabet ($GOOG)

How does the company make money?

Alphabet dominates digital advertising through Google Search and YouTube.

Advertisers bid for placement in an auction model.

Beyond ads, it earns from Google Cloud, the Play Store, and hardware, though advertising remains roughly 75% of revenue.

Why is it an interesting company?

• Dominant core business (Search + Ads): Alphabet’s revenue engine is still built around search advertising, where it effectively forms a duopoly with Meta Platforms in digital ads.

• Wide economic moat: Its leadership is reinforced by deep structural advantages, strong network effects, a globally trusted brand, unmatched data scale, and meaningful switching costs.

• Self-reinforcing ecosystem: More users generate more data, which improves ad targeting and search quality, which in turn attracts more users and advertisers.

• Strong capital allocation: Alphabet is a cash flow machine.

• Multiple growth engines: Think about AI, YouTube, and “other bets”. They are diversifying beyond search.

At which price are we interested?

Alphabet is an amazing company, but it also did really well recently.

The stock is up +123% in the past year.

As a result, the valuation looks rather expensive. Alphabet now trades at a Forward PE of 28.9x.

I would love to buy Alphabet at a Fwd PE of 18x.
This would mean at a stock price of $210 (current stock price: $336.0)

ASML ($ASML)

How does the company make money?

ASML has a monopoly in producing chip machines (EUV lithography machines).

They are essential for producing the world’s most advanced chips.

Every major chipmaker in the world, from TSMC to Intel, buys its machines from ASML.

Why is it an interesting company?

• The only company that makes the machines that make chips: No ASML means no iPhones, no AI, no nothing. They have 90% market share and literally zero real competitors.

• Impossible to copy, even for entire countries: One of their machines weighs as much as two blue whales and takes decades of knowledge to build. China has been trying to replicate it for years. They’re nowhere close.

• Once you’re a customer, you’re a customer forever: Chip factories can’t just switch suppliers. It would cost billions. So ASML collects service fees for 20–30 years after every single sale.

• AI is a money printer for them: More AI → more chips needed → more factories built → more ASML machines ordered. Every dollar spent on AI eventually flows back to ASML.

• They bet big and won bigger: ASML spent over a decade losing money on a technology nobody was sure would work. It worked and ASML is now reaping the benefits from this.

At which price are we interested?

ASML is an amazing company. They currently trade at a Forward PE of 36.8x.

This is rather expensive from a historical point of view. The average Forward PE of the past 10 years equals 32.0x.

Personally, I’d consider owning ASML at 25x earnings.

This means we would become interested at a stock price of €745 (current stock price: €1.245).

Now let’s dive into the three final companies.

Read more

Did you see Part I of Our Portfolio update last Thursday? You can find it here.

This extensive Portfolio Update consists of 100 (!) pages.

That’s why it’s split in multiple parts.

Here’s what the schedule looks like:

• Last Thursday: Portfolio Update April 2026 (Part I)

• Today: Portfolio Update April 2026 (Part II)

• Tuesday 21 April: Companies we might add (Part I)

• Thursday 23 April: Companies we might add (Part II)

• Sunday 26 April: How the Portfolio will evolve from here

Are you ready? Let’s get a little bit wiser today!

By the way, for those who missed it: you can find the recording of our webinar of 100 (minutes) where we go over every position in the Portfolio in Our Community.

Portfolio Update April 2026 (Part II)

For full transparency, as a Partner of Compounding Quality you have full transparency to the Portfolio here.

Our Portfolio

We are invested in wonderful companies that continue to generate more shareholder value year after year.

Our companies are also fundamentally healthier than the market:

More and more Free Cash Flow is generated over time:

There are four conviction levels in Our Portfolio:

1. Very Strong (Our favorite companies right now)

2. Strong+ (Strong convictions we have no single doubt about)

3. Strong (Proud owners but there are some risks involved)

4. Medium (Should we consider selling these stocks?)

We currently own 18 companies.

On Thursday, we covered all the ‘Very Strong’ and ‘Strong+’ convictions.

Today, we’ll go over the ‘Strong’ and ‘Medium’ convictions.

Should we make portfolio changes?

Let’s find out together.

Here’s an overview of every company in Our Portfolio:

Read more

It’s time for another Portfolio Update.

And let me start with a serious warning: this update will be very extensive. It has over 100 (!) pages.

That’s why it’s split up in multiple parts:

Are you ready? Let’s get a little bit wiser today!

Portfolio Update April 2026

Today we’ll switch gears a little bit.

Over the past few weeks, I’ve been thinking a lot about our current positioning.

• Which companies am I the most sure about?

• For which companies is the conviction level lower?

• And which companies are we considering adding to the Portfolio?

Let’s dive in right away.

Our Portfolio

For full transparency, Partners of Compounding Quality have full transparency to the Portfolio here.

Our Portfolio

We are invested in wonderful companies that continue to generate more shareholder value year after year:

There are four conviction levels in Our Portfolio:

1. Very Strong (Our favorite companies right now)

2. Strong+ (Strong convictions we have no single doubt about)

3. Strong (Proud owners but there are some risks involved)

4. Medium (Should we consider selling these stocks?)

We currently own 18 companies.

Please note that tonight we are giving an exclusive webinar for Partners going over every single position in the Portfolio.

Here’s an overview of the conviction level per stock in Our Portfolio:

Read more

I hope you are doing well.

This Thursday, we are doing a very exclusive webinar.

We will give an update of every single stock in Our Portfolio.

This is the most honest and fully transparent webinar I’ve ever done.

📅 When? Thursday, 16 April at 1 PM ET (7 PM CET)
👥 Who’s it for? Exclusively for Partners
💻 Where? Online

You can register here:

Register for the webinar

See …

Read more

By investing in holdings, you invest in multiple companies at the same time.

On top of that, they have proven they can outperform the market.

What are Holdings?

Holding companies are different from regular companies.

They don’t make goods or provide services, they own pieces of other companies.

Holding companies make money in 2 ways:

• The appreciation in value of the companies they own

• Dividends

The most important thing for a holding company isn’t running the business.

It’s making great capital allocation decisions (choosing which companies to invest in).

Why are Holding Companies Interesting?

Holding companies usually trade at a discount.

This means you can buy them at a cheaper price than what they are actually worth.

Brookfield Corporation is a great example.

The holding is active in different segments:

To understand Brookfield, you have to understand each one of these businesses.

That takes a lot of time and effort.

But it also creates opportunities.

Investors often ignore these companies, causing them to trade at discounts.

Brookfield Corporation currently trades at a price of $42.
Their intrinsic value? $68.

This means Brookfield Corporation trades at a 38% discount.

This is a large discount from an historical perspective.

On top of that, their track record is amazing.

Brookfield has compounded at an impressive 16.6% per year since 2001.
They outperformed the S&P 500 by a wide margin.

You can read more about Brookfield Corporation here.

🏆13 Interesting Holding Companies

Now let’s dive into 13 holding companies you should know.

1. Investor AB ($INVE-B)

Investor AB is a Swedish holding company managed by the Wallenberg family. They have been around since 1916.

They own major Swedish companies such as Atlas Copco, ABB, and AstraZeneca.

Their Portfolio allocation by business segment looks like this:

1. Listed Companies (72%): Core strategic holdings like Atlas Copco, ABB, AstraZeneca, ...

2. Patricia Industries (19%): Wholly-owned subsidiaries like Mölnlycke

3. Investments in EQT (9%): EQT is a global investment firm focused on private equity, infrastructure and real assets

Since 2001, Investor AB returned 14.3% per year to shareholders.

2. Scottish Mortgage Investment Trust ($SMTL)

Scottish Mortgage is a global investment trust.

They identify and invest in exceptional public and private companies that are building the future of the global economy.

Via $SMT, you get exposure to companies you could otherwise never own.

Think about companies like SpaceX, Anthropic and ByteDance (TikTok).

Their top 5 positions look as follows (weight in %):

1. Space X (15.3%)

2. TSMC (5.7%)

3. MercadoLibre (4.8%)

4. ByteDance (4.1%)

5. Amazon (4%)

Since 2001 the stock compounded by 14.4% per year.

3. MBB SE ($MBB)

MBB is a German family-owned company that invests in other family businesses.

The Freimuth family owns 71% of MBB SE through MBB Capital Group.

They focus on secular trends such as the energy transition and cybersecurity.

These themes will only become more important over the next few decades.

Their top 5 positions looks as follows (weight in %):

1. Friedrich Vorwerk (44.2%)

2. Cash (26.9%)

3. Private Equity - Unlisted Companies (22.3%)

4. Aumann AG (5.5%)

5. Delignit AG (1.1%)

Since the IPO in 2006 the stock compounded by 17.4% per year.

4. Markel Group ($MKL)

Markel is often seen as a mini Berkshire Hathaway.

It’s an insurance company led by Tom Gayner.

The interesting thing is that they can reinvest their insurance float in listed stocks as well as fully owned private businesses.

Their top 5 positions looks as follows (weight in %):

1. Berkshire Hathaway Inc (12.8%)

2. Alphabet Inc. (6.9%)

3. Brookfield Corporation (4.8%)

4. Amazon.com (3.7%)

5. Deere & Company (3.3%)

Since 2001 the stock compounded by 9.9% per year.

5. Ackermans & van Haaren ($ACKB)

Ackermans & van Haaren is a Belgian family‑controlled holding company.

They specialize in marine engineering, real estate, private banking, and private equity.

Their top segment positions looks as follows (weight in %):

1. Private Banking (33.0%)

2. Marine Engineering & Contracting (32.0%)

3. Growth Capital (18.0%)

4. Real Estate (10.0%)

5. Energy & Resources (7.0%)

Since 2001 the stock compounded by 11.4% per year.

6. Sofina ($SOF)

Sofina is a Belgium-based global investment company controlled by the Boël family.

It started in 1898 by financing electricity and tramway projects across Europe and Latin America.

Since 1950s it has slowly shifted towards reallocating capital into listed equities and later private investments.

Today it invests across Europe, North America, and Asia actively in essential sectors like consumer, digital, education, and healthcare.

Their top 5 direct investments looks as follows (% weight):

1. ByteDance (7.0%)

2. Cognita (6.0%)

3. Nuxe (3.7%)

4. Drylock Technologies (3.0%)

5. Proeduca (2%)

Since 2001 the stock compounded by 8.6% per year.

7. Brookfield Corporation ($BN)

Brookfield Corporation is a Canadian holding company and one of the world’s leading owners of essential real assets.

Through its subsidiaries, it owns and operates critical infrastructure and energy assets that power economies globally.

The CEO, Bruce Flatt, is often referred to as the Canadian Warren Buffett.

It’s a high-quality business we’re proud to own in our portfolio.

Brookfield owns stakes in the following subsidiaries (% they own):

1. Brookfield Asset Management (73.0%)

2. Brookfield Wealth Solutions (100%)

3. Brookfield Infrastructure Partners (60.0%)

4. Brookfield Renewable Partners (30.0%)

5. Brookfield Business Partners (90.0%)

Since 1993 the stock compounded by 19.0% per year.

8. Exor ($EXO)

Exor is an Italian holding company controlled by the Agnelli family.

The Agnelli family still owns 50% of Exor.

Exor invests a lot in traditional companies. Think about Ferrari, Stellantis and Philips.

Their top 5 positions looks as follows (% weight):

1. Ferrari (32.4%)

2. Stellantis (11.5%)

3. Philips (11.4%)

4. Lingotto (11.3%)

5. CNH (7.8%)

Since its listing in 2022, the stock compounded by 1.5% per year.

9. Constellation Software ($CSU)

Constellation Software is the best serial acquirer in the world. The stock has consistently compounded at +30% per year.

Just 15 years after their IPO in 2006, Constellation had already joined the 100-bagger club. It’s an amazing business.

You can read the Deep Dive here.

Constellation Software is active in 6 different operating segments through its subsidiary companies. Let's take a look at them:

1. Harris Computer Systems ( ~30% of group revenue): The largest and oldest operating group, with 100+ software businesses across utilities, healthcare, and government

2. Volaris Group (~25% of group revenue): The most internationally diversified group, with 150+ businesses across 40+ verticals including agri-food, financial services, and education

3. Topicus.com (~15% of group revenue): Topicus was spun out of Constellation in 2021 to allow it to compete more aggressively for larger European deals using its own listed share currency

4. Jonas Software (~15% of group revenue): Operates 140+ companies across 40+ verticals, with a strong North American base in hospitality, construction, and fitness

5. Perseus Group (~10% of group revenue): Focused on real estate, pharmaceutical, government, and pulp & paper software niches

6. Vela Software (~5% of group revenue): The smallest of the six, primarily focused on industrial and asset-heavy sectors

Since its IPO in 2006 the stock compounded by 29.9% per year.

10. Brederode ($BREB)

Brederode is a Belgian holding company that invests mainly in Private Equity (non-listed companies).

It is controlled by the Van der Mersch family. They still own 55.0% of Brederode.

Their portfolio consists of 62.9% Private equity funds and 37.1% Listed stocks.

Their top 5 positions looks as follows (% weight of the listed stock portfolio):

1. Alphabet (15.1%)

2. Iberdrola (11.2%)

3. Mastercard (9.7%)

4. Enel (7.8%)

5. Novartis (6.2%)

Since 2001 the stock compounded by 8.5% per year.

Now let’s dive in the top 3.

Read more

They sell cosmetic products for women and men worldwide. Think about skincare, makeup and much more.

But is it an interesting stock? Let’s find out today.

L’Oréal - General Information

• 👔 Company name: L’Oréal

• ✍️ ISIN: FR0000120321

• 🔎 Ticker: OR

• 📚 Type: Owner-Operator

• 📈 Stock Price: €367.4

• 💵 Market cap: €184.8B

• 📊 Average daily volume: €144.6M

Onepager

Here’s a onepager with the essentials of L’Oréal

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give L’Oréal a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

The company behind your favorite beauty essentials?

Go take a look in your bathroom and you’ll see it’s probably L’Oréal.

They’re all about making us feel good.

L’Oréal sells beauty and confidence with their iconic products.

And they do it through 37 brands in 150 countries.

Here’s a sneak peek at some of their products:

• Maybelline New York

• Garnier

• Lancôme

• L’Oréal Paris

L’Oréal is the number 1 beauty company worldwide.

Their market share equals approximately 14.5%.

The company is active in four different segments:

• Consumer Products (36.5%): You’re likely already familiar with these products. You can find L’Oréal’s consumer products in stores like Sephora or Ulta Beauty

• L’Oréal Luxe (35.4%): L’Oréal works with high luxury brands such as Giorgio Armani and Prada through licenses

• Professional Products (11.7%): Products directly sold to hairstylists

• Dermatological beauty (16.4%): Sells medical-grade skincare products

L’Oréal is very well diversified in all aspects:

2. Is management capable?

Do you know the average tenure of a CEO? It’s 8.1 years.

L’Oréal does it differently.

In its long history of 115 (!) years, they only had 6 CEOs.

That’s 19 years on average per CEO. This is an indication of the stability and strong culture of the business.

The current CEO is Nicolas Hieronimus. He started at L’Oréal in 1987.

Nicolas is a manager who is actively working on the future.

He even has a team researching skin aging in space.

He might have stolen this idea from Leonard Lauder, the son of Estée Lauder, who said the following:

Think in decades, not quarters. 

The Frenchman owns €87.2 million worth of shares.

But there’s an even bigger insider. A way bigger one.

It’s Françoise Bettencourt.

She still owns over 29.5% of the business which makes her the second richest woman in the world.

Her estimated net worth is $91.3 billion. She is active on the Board of Directors.

She owns a large share of L’Oréal, inherited from her mother, Liliane Bettencourt, whose father founded the company.

3. Does the company have a sustainable competitive advantage?

L’Oréal has very strong brands.

People spot their products right away on the store shelves.

However, there’s an important nuance there.

Year after year, L’Oréal spends roughly 32% of its revenue on advertising and promotion expenses.

It makes you wonder what is doing the heavy lifting: the brand or the advertising?

The piranhas are its high barriers to scale.

It’s not so hard to get some local market share but it takes decades to come to the scale that’s relevant to compete with L’Oréal.

And don’t forget the crocodiles. These are L’Oréal’s cost advantages.

Its large scale lets it make products way cheaper than small competitors.

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Margin: 74.3% (Gross Margin > 40%? ✅)

• Return On Invested Capital (ROIC) 13.9% (ROIC > 15%? ❌)

The high and increasing Gross Margin might indicate that L’Oréal has pricing power.

4. Is the company attractive in an interesting end market?

Although the beauty market is mature, there are still some interesting trends:

• The aging population has an increasing need for beauty products

• L’Oréal benefits from a rising middle class in Asia, projecting 600 million potential new customer by 2030

• Skin care is a fast growing, global trend

The Global Beauty and Personal Care Product market is projected to grow by 6.7% per year until 2030.

Even though L’Oréal isn’t active in a fast-growing industry, the risk of disruption is pretty low.

A great company stays great for a long time.

L’Oréal is just like that.

If a company keeps doing well with the same products, it’s fair to think it will keep doing well.

"I very frequently get the question: ‘What’s going to change in the next 10 years?’ And I almost never get the question: ‘What’s not going to change in the next 10 years?’ I submit to you that that second question is actually the more important of the two, because you can build a business strategy around the things that are stable in time." - Jeff Bezos

5. What are the main risks for the company?

Here are the main risks for L’Oréal:

• The law of large numbers: With around $51.7 billion in annual sales, L’Oréal’s size makes rapid growth more challenging. This is a great example of the law of larger numbers at play: the larger a business, the harder it becomes to grow

• Intense competition from rivals like Estée Lauder, Procter & Gamble, and Unilever

• Rising threat from niche beauty brands gaining market share

• Digitalization allows smaller competitors to reach customers online. They don’t have to battle for expensive shelf space anymore

• Economic downturns reducing consumer spending on beauty products

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of the balance sheet:

• Interest coverage: 24.3x (interest coverage > 15x? ✅)

• Net Debt/FCF: 0.3x (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 23.4% (Goodwill to assets < 20%? ❌)

In an ideal world, we would love to see less goodwill.

7. Does the company need a lot of capital to operate?

The less capital a business needs to operate, the better

Here’s what things look like for L’Oréal:

• CAPEX/Sales: 3.4% (CAPEX/Sales? < 5%? ✅)

• CAPEX/Operating cash flow: 19.6% (CAPEX/Operating CF? < 25%? ✅)

L’Oréal has a capital light business model.

This means that it can take a large part of Free Cash Flow to invest in growth or to distribute to shareholders.

8. Capital allocation

Capital allocation is the most important task of management.

We are looking for businesses that are capable of allocating the resources of shareholders effectively.

L’Oréal:

• Return on equity (ROE): 18.0% (ROE > 20%? ❌)

• Return on Capital (ROIC): 13.9% (ROIC > 15%? ❌)

Here’s an evolution of L’Oréal’s ROE and ROIC:

In an ideal world, we would prefer these numbers to be a little bit higher.

9. How profitable is the company?

The higher the profitability of the business, the better.

Here’s what thing looks like for L’Oréal:

• Gross margin: 74.3% (Gross margin > 40%? ✅)

• Net Profit Margin: 13.9% (Net Profit Margin > 10%? ✅)

• FCF/Net income: 116.9% (FCF/Net income > 80%? ✅)

10. Does the company use a lot of Stock-Based compensation?

Stocks-based compensation is a cost for shareholders and should be treated accordingly.

Preferably, we want SBCs as a % of Net Income to be lower than 10%.

L’Oréal:

• SBCs of a % of Net Income: 4.8% (SBSs/Net income < 10%? ✅)

• Avg. SBC as a % of Net Income past 5 years: 3.8% (SBCs/Net income < 10%? ✅)

L’Oréal does not use a lot of Stock-Based Compensation.

This is a positive for investors.

11. Did the company grow at attractive rates in the past?

Let’s look at what the recent history tells us:

• Revenue growth past 5 years (CAGR): 9.5% (revenue growth > 5%? ✅)

• Revenue growth past 10 years (CAGR): 6.1% (revenue growth > 5%? ✅)

• EPS growth past 5 years (CAGR): 12.5% (EPS growth > 7%? ✅)

• EPS growth past 10 years (CAGR): 7.1% (EPS growth > 7%? ✅)

The company has grown at attractive rates in the past.

12. Does the future look bright?

Let’s look at what the estimates are:

• Exp. Revenue growth next 2 years (CAGR): 5.0% (revenue growth > 5%? ✅)

• Exp. EPS growth next 2 years (CAGR): 12.1% (revenue growth > 7%? ✅)

• Long-term growth estimate EPS (CAGR): 7.0% (EPS growth > 7%? ✅)

In an ideal world, we would love to see the revenue growth a bit higher.

13. Does the company trade at a fair valuation level?

L’Oréal’s iconic slogan is “Because You’re Worth It.”

Let’s explore what L’Oréal is worth to investors.

We always use three methods to look at the valuation of a company:

• A comparison of the Forward PE multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the Forward PE multiple with its historical average

The first thing we do is compare the current forward PE with its historical average over the past 10 years.

This is a shortsighted method to give a quick indication.

Today, L’Oréal trades at a forward PE of 27.0x compared to a historical average of 31.5x.

As you can see, the valuation of L’Oréal came down significantly since 2022.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

Here are the assumptions I use:

• EPS growth: 7.0% per year over the next 10 years

• Dividend Yield: 1.7%

• Forward PE to decline from 27.0X to 25.0x

An expected yearly return of 8.0% is good, but we target a higher expected return in general.

Reverse DCF

Charlie Munger once said that if you want to find a solution to a complex problem, you should invert. Always invert. Turn the problem upside down.

This is exactly what a reverse DCF does.

As an investor, we don’t make assumptions. We simply look at what assumptions the market has made and see whether they are reasonable.

The expected Free Cash Flow of the next 12 equals €7,350.0 million.

We subtract the Stock-Based Compensation (€248.0 million) and add Growth CAPEX (€54.0 million) to arrive at FCF in year 1 of €7,156.0 million.

The reverse DCF indicates that L’Oréal should grow its FCF by 13.0% each year for the coming 10 years.

This valuation seems to quite high.

Over the past 10 years, L’Oréal grew its FCF by 8.7% per year.

L’Oréal:

• Forward PE: 27.0x (lower than its 10-year average? < 31.5x? ✅)

• Earnings Growth Model: 8.0% (Yearly return? < 10%? ❌)

• FCF-Growth Reverse DCF: 13.0% (Realistic growth expectations? ❌)

L’Oréal seems to be trading at rich valuation levels.

14. How did Owner’s Earnings evolve in the past?

Over time, stock prices tend to follow the Owner’s Earnings of the company (EPS growth + Dividend Yield)

That’s why we want to invest in companies that managed to grow their Owner’s Earnings at attractive rates in the past.

L’Oréal:

• CAGR Owner’s Earnings (5 years): 14.6% (CAGR Owner’s Earnings > 12%? ✅)

• CAGR Owner’s Earnings (10 years): 9.1% (CAGR Owner’s Earnings > 12%? ❌)

15. Did the company create a lot of shareholder value in the past?

We want to invest in companies that managed to compound at attractive rates in the past.

Ideally, the company returned more than 12% per year to shareholders since its IPO.

Here’s what the performance of L’Oréal looks like:

• YTD: +0.6%

• 5-year CAGR: +3.2%

• CAGR since 2001: +8.2% (CAGR since 2001 > 12%? ❌)

Quality Score

Finally, let’s bring everything together and give the company a Total Quality Score.

As you can see in the table below, L’Oréal gets a Total Quality Score of 7.8/10

The key conclusion?

L’Oréal is a wonderful business but the future growth prospects are too low.

I would love to own L’Oréal at 20x earnings.

This means I would love to buy L’Oréal at a price of €271 (current stock price: €367.4).

There are more attractive companies today if you ask me.

Which ones?

The ones in Our Portfolio!

Partners have 24/7 access to the Portfolio here:

Everything in life compounds
Team Compounding Quality

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

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

It’s about how you think and make choices.

I try to be more rational by using three main strategies:

• Writing

• Checklists

• Community

Let’s explore how they can help you in investing.

Skill or luck?

The goal of Compounding Quality? It’s to outperform the market in the long term.

One thing that helps for s…

Read more

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

Let’s get a little bit wiser today.

Subscribe now

March 2026

The S&P 500 declined by -5.3% in March.

Investors are extremely fearful today according to the Fear & Greed Index:

Read more

The sad thing? Public market investors like us never had access to this strategy.

But this changed with Kingsway.

1. How does Kingsway make money?

The business model

“C-companies hire behind the curve. B-companies hire ahead of the curve. A-companies hire and fire ahead of the curve.” — Irv Grousbeck

Th…

Read more

Recently, a Partner asked a very interesting question:

Doing the right thing during tough things is one of the most important things for successful investors.

Let’s share the framework we use, and how you can apply it too.

Are times tough?

If you feel bad about underperforming the market since the beginning of the year, please note the follow…

Read more

But which haystack should you buy?

Let’s dive into our ETF Portfolio today.

Subscribe now

Passive investing 101

Passive investors don’t try to beat the market.

They are more than happy with matching the performance of the market.

To build wealth you don’t have to beat the market, just follow these simple steps:

1. Spend less than you earn

2. Invest at least 10% of your income every single month

Everyone can do it.

You don’t need to be interested in investing or spend a lot of time researching stocks.

Why Does Passive Investing Work?

1. Lower Costs: Passive funds are cheaper than active funds

2. Lower Stress: you can automate your investments and ignore the market

3. Market Growth: The stock market tends to go up in the long run

Another big reason passive investing works?

Diversification.

When you invest in an ETF, you own a small part of many companies.

This spreads out your risk.

If one company does poorly, it won’t hurt you as much because you have a lot of other investments.

Diversification doesn’t just mean owning a lot of different companies.

It means owning companies in different places.

Global Diversification

You can’t predict where the next winner will come from.

Since the bottom of the Global Financial Crisis in March of 2009, US stocks have compounded at 15% per year.

They have outperformed almost every asset over this period.

It feels like US stocks will keep going up forever.

So why wouldn’t you solely invest in US ETFs?

Because US stocks don’t always outperform.

The chart below shows the rolling 5-year returns.

• Blue areas show where the US outperformed

• Red areas show where the rest of the world outperformed

The US outperformance can’t go on forever.

If it did, US stocks would eventually make up 100% of the global stock market.

The chart below shows the market share of the following countries:

• The United States

• Europe, ex-UK

• Emerging Markets

• Japan

You can see that US stocks already make up a lot of the global market cap.

In 2025, the S&P 500 had a total return of 18.1%, which is amazing!

But it’s lower than a lot of other markets.

Here’s the performance of different regions:

• US stocks (purple): 18.1%

• Emerging Markets (pink): 25.9%

• Asian Stocks (green): 32.7%

• European Stocks (orange): 36.4%

The US market is also quite expensive at this point in time.

Buying the S&P 500 at the current valuation levels will probably yield lower returns:

But how do you diversify outside the United States?
How do you play this idea?

Let’s find out together.

Read more

Perhaps Constellation Software, Berkshire Hathaway, …

But a company often forgotten on that list is TransDigm.

In fact, here’s what a $1,000 investment 10 years ago would be worth today:

• Berkshire Hathaway: $1,000 → $3,400

• Constellation Software: $1,000 → $5,300

• TransDigm…

Read more

But what about the psychological aspect of investing?

How do you keep your head cool and make sound investment decisions?

Let’s dive in right away.

Humans = Emotional

We as humans are way less rational than we would dare to admit to ourselves.

That’s exactly where the term herd behavior comes from.

It’s very hard to go against the crowd.

As an investor, you should be aware of the many biases you suffer from:

• Recency bias: Assuming recent trends will continue in the future

• Loss aversion: A loss of $100 feels twice as painful as the satisfaction of a $100 gain

• Confirmation bias: Only looking at information that supports your current opinion

• Overconfidence bias: Believing you are better at picking stocks or timing the market than you really are

• Sunk cost fallacy: Continuing to hold or invest in a losing position because of prior time or money spent

• Mental accounting: Treating money differently based on where it came from or how it’s labeled, rather than overall value.

The list goes on and on.

We even dedicated a full article to it called ‘9 Investing truths to remember’.

But we didn’t talk about the biggest risk for you as an investor yet…

… Fear and greed.

Both fear and greed makes you take irrational investment decisions.

That’s also why the best investors in the world are usually seen as ‘cold’.
They seem to be able to turn off their emotions.

Everyone knows this statement from Warren Buffett:

But it also means the following…

As an investor you tend to become overconfident when your stocks are doing well.

And you tend to doubt yourself when things aren’t going your way.

You should mentally wire yourself to do exactly the opposite.

So how do you not lose your mind when times are hard?

Or even better: swing heavily so you set the foundation for phenomenal returns in the future?

Ownership Thinking

You know it already, but it’s still worth repeating:

If you invest in a company, you are the (co-)owner of the business.

This also means that if you buy a single stock of a company, you should be willing to buy the entire business.

You buy 10 shares of Apple?

This means you think the company is worth more than $3.7 trillion.
You would like to buy the entire company for this amount if you had the money*.

If you have $3.7 trillion available, please send me an email :)

Let’s give another example.

Imagine you are the owner of the local grocery store around the corner.

It’s a family business.

Your grandfather ran the company for over 40 years and passed it to your parents.

Recently, your parents passed the company to you. You want to do exactly the same thing with your kids one day.

What would be the most important thing to you in this case?

1. How much the company is worth today according to investors

2. How much you’re making every single year with the business

3. The future growth prospects of the company

If you have no intention of selling the company, the only thing that should matter to you are points 2 and 3.

You should think exactly the same about your stocks.

If you’re focusing too much on point 1 (what the company is worth today), you are focusing on The Greater Fool Theory.

You buy an asset at a high price. Not because you think it's actually worth that much…

… But because you're betting that someone else will pay even more for it later.

That "someone else" is the greater fool.

Owners 🆚 Speculators

There is an important distinction between Owners and Speculators:

• Owners:

  • Don’t care much about fluctuations in the stock price

  • Care about the cash flow and future growth prospects

• Speculators:

  • Care a lot about fluctuations in the stock price

  • Doesn’t care much about the cash flow and future growth prospects

As a successful investor, you should think and act like an Owner.

Owner’s Earnings

Focus on how much profit your companies are making for you.
Not the price you could sell them for today.

For stocks, this means you look at the Owner’s Earnings.

It’s very easy to calculate this metric:

Over the past 10 years, Our Portfolio has grown its Owner’s Earnings by 19.7% per year:

Know What You Own

Just knowing that your companies are making more and more money for you isn’t enough.

You have to understand what you own and why you own it.

Just listen to Peter Lynch.

When you don’t understand a business, a falling stock price looks like a warning.

It makes you think something is broken.

In that case it’s easy to start panicking.

But if you think like a store owner, a falling price is just a sale.

• The Speculator sees the stock price drop and panics. They think they’ve lost money.

• The Owner checks the shelves. Customers are still buying milk. The business is just as healthy as yesterday.

It’s the same as when you own a house.

You don’t wonder every single day whether the value of your house has gone up or down.

You want to own your house for the long term.

Decision-Making

The worst investment decisions are made on emotions.

Whether you are feeling euphoric because a stock is going up…

… or panicking because a stock is going down…

… You need to stop doing that right away.

Emotional decisions are almost always expensive mistakes.

Let’s talk about three ways to avoid them:

1. Write down your investment thesis

2. Decide in advance when you want to sell

3. Is it a price drop or a fundamental problem?

1. Write down your investment thesis

The best investors keep an investment journal.

Before you buy a single share, write down exactly why you are buying the company.

• What does the company do?

• Why do I think the company is undervalued?

• Which growth rate do I expect in the years ahead?

Keeping an investment journal helps you structuring your thoughts and do the rational thing.

That’s exactly why we have a daily investment journal in the Community:

2. Decide in advance when you want to sell

You should decide when you want to sell a company before you buy it.

This keeps you from making up excuses in the heat of the moment.

An owner usually only sells for three reasons:

1. The business fundamentals have permanently shifted (the grocery store is losing customers to a new competitor)

2. The stock has become so overvalued it defies all logic

3. You found a significantly better place to invest your capital

Read this article if you want to learn more: 👑 Reasons to sell a stock.

3. Is it a price drop or a fundamental problem?

Mr. Market is manic-depressive. This means that a falling stock price is just market noise most of the time.

If you can buy a good business at a cheaper price, it’s an opportunity.

If something fundamentally changed, it’s a business problem.

As Warren Buffett said, stocks are like hamburgers:

It’s a long term game

Always remember that we’re investing for the long-term.

Here are a few things to help you to keep a long term perspective.

1. Time in the market beats timing the market

On the stock market, the best days usually take place just after the worst days.

Missing just a few of them can have a huge impact on your returns.

2. Doing nothing is a strategy

In investing, effort doesn’t equal results.

When you own a business that grows its earnings 20% every year, the best move is to do nothing.

Charlie Munger said it best:

3. Think in years and decades

Wall Street thinks in quarters.

The best investors think in decades.

One of my favorite tweets from Morgan Housel shows you why:

4. Volatility is your friend

Remember that volatility is very normal. As an investor, it’s your friend.

But it can be hard to sit through.

Here’s a section from Howard Marks’ memo ‘Selling Out’ that illustrates this perfectly.

How to Stay Rational

The basics of investing are simple.

Terry Smith summarized it in just three rules:

But investing isn’t easy.

Your emotions usually try to make you do the wrong thing.

Here are a few tips you can use to stay rational.

• Check the business, not the ticker: Don’t check stock prices daily. Price fluctuations are just noise. Watch the Owner’s Earnings instead.

• The 48-hour rule: Never buy or sell in a hurry. If you feel the urge to act, wait 48 hours before making a decision.

• Position sizing: Even a great company can fail. Never let one stock become so large that daily price movements keep you awake at night.

• Focus on the long term: Compounding happens over years and decades.

• Turn off the news: Financial news is designed to make you act (and earn ad revenue). If you want to be a better investor, read less news and more annual reports.

• Keep a decision journal: Write down why you bought a stock and how you felt. Reviewing your past mistakes will help you avoid making the same ones in the future.

Conclusion

At the end of the day, investing isn’t about being the smartest person in the room.

It’s about being the most rational and disciplined.

The stock market is the only place in the world where people run out of the store when there is a 30% off sale.

By training yourself to see a stock as a piece of a business instead of a ticker on a screen, you give yourself a massive advantage.

Remember:

• Speculators focus on what a stock might be worth tomorrow.

• Owners focus on what the business will earn over the next decade.

Keep your head cool, watch the Owner’s Earnings, and let time do the heavy lifting for you.

Everything In Life Compounds
Team Compounding Quality
PS You are not a Partner of Compounding Quality yet? Discover everything you need to know here.

Book

• Order your copy of The Art of Quality Investing here

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.

A lot of high-quality companies are on sale.

There have never as much ‘Buys’ on Our Buy-Hold-Sell List as today.

Let’s dive in right away.

All-time highs

Even despite the war in the Middle East, the S&P 500 still trades near its all-time high.

Is this a moment to take some profits from the table?

As Warren Buffett said: “Be fearful when others are greedy and greedy when others are fearful.”

Let’s take a deeper look.

The Magnificent Seven has done most of the heavy lifting over the past few years:

• Apple (AAPL)

• Microsoft (MSFT)

• Alphabet (GOOGL)

• Amazon (AMZN)

• NVIDIA (NVDA)

• Meta Platforms (META)

• Tesla (TSLA)

These seven companies make up over 30% of the S&P 500.

Excluding The Magnificent Seven, the returns of the S&P 500 over the past few years are much lower:

The same is true for the valuation levels.

The chart below compares the Forward P/E of the index's top 10 companies against the rest.

Once the largest companies are removed, the broader market appears far more reasonably valued.

I compared some of the world’s best investors against the S&P 500.

• Red: the investor is trailing the S&P 500

• Green: the investor is beating the S&P 500

Top investors like Terry Smith, Chuck Akre, Warren Buffett, and Bill Ackman have all fallen short of the index over the past three years.

Two key lessons stand out:

1. The market is acting strangely. The index itself is trading at high valuations.

2. This creates real opportunities in stocks that have recently lagged the index. Many of them look undervalued today.

An example: Quality at a discount

You want to own quality companies that generate real cash flows.

A great example of this? Topicus ($TOI.V).

Topicus is a spin-off from Constellation Software. They structurally acquire small Vertical Market Software companies in Europe.

Here’s what their growth numbers look like:

• 5-year Revenue (CAGR): +25.7%

• 5-year Operating Profit (CAGR): +20.6%

I expect this company to keep growing by at least 15% per year going forward.

Since 2021, Topicus doubled its Revenue and Operating Profit.

That’s amazing.

So what if you invested in Topicus during the summer of 2021?

Your return would be zero.

Topicus is now trading at one of its cheapest valuation levels ever:

You should always keep this quote from Warren Buffett in your mind:

It may sound weird, but stocks are like hamburgers.

You should pray for lower stock prices.

I truly believe Topicus is attractively valued right now.

That’s why a company like Topicus could offer great opportunities today.

Buy-Hold-Sell List: March 2026

Let’s now update our Buy-Hold-Sell List.

Worst performers

The 10 worst performers on our watchlist so far this year:

Best performers

The 10 best performers on our watchlist so far this year:

Update Buy-Hold-Sell List

Now lets look into the changes on our watchlist.

One company was removed from the watchlist:

• Goeasy: Goeasy provides loans to non-prime customers in Canada who have been turned down by big banks. We decided to remove the company from our watchlist for 2 main reasons:

  • Both the CEO and CFO left the company in 2025

  • Governments are capping interest rates. This directly impacts the profitability of goeasy

Two companies went from Sell to Hold:

• Fair Isaac: A provider of the industry-standard FICO credit score

• Equifax: One of the three major U.S. credit reporting agencies

Two companies went from Buy to Hold:

• Dream Finders Homes: A fast-growing homebuilder in the US

• Watsco: The largest distributor of HVAC equipment and parts in North America

Three companies went from Hold to Buy:

• S&P Global & Moody’s: Duopoly in global credit ratings

• Pool Corp: A dominant distributor in the swimming pool supply industry

Currently there are 45 stocks on ‘Buy’.

This number has almost never been higher.

You can download the entire Buy-Hold-Sell List here:

Read more

A lot of people use Windows or Microsoft Office every single day.

The stock is currently down 25% from its peak.

Does it make Microsoft an interesting investment? Let’s find out.

Microsoft - General Information

• 👔 Company name: Microsoft Corporation

• ✍️ ISIN: US5949181045

• 🔎 Ticker: MSFT

• 📚 Type: Oligopoly

• 📈 Stock Price: $391.8

• 💵 Market cap: $ 2.91 trillion

• 📊 Average daily volume: $13.6 billion

Onepager

Here’s a onepager with the essentials of Microsoft.

You can click on the picture to expand:

15-Step Approach

Let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give Microsoft a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

Microsoft is a leading technology company that develops, licenses, and supports software products, services, and devices.

Founded in 1975 by Bill Gates and Paul Allen, Microsoft has grown into one of the world’s most well-known and valuable companies.

Gates wanted to build a platform like no other:

Microsoft is active in three main markets:

• Productivity and Business Processes (42.6% of total revenue): This includes sales of Microsoft Office software, such as Word and Excel, and subscription services like Microsoft 365. It also covers business tools like LinkedIn and Dynamics 365

• Intelligent Cloud (39.4% of total revenue): Microsoft makes money from its Azure cloud services, which provide computing power, storage, and other services to businesses

• More Personal Computing (18.0% of total revenue): This segment includes revenue from Windows operating system licenses for PCs, sales of Surface tablets and laptops, and Xbox gaming consoles. It also covers advertising and search revenue from Bing

So next time you’re working on a document or playing a game, remember Microsoft is behind the scenes making it all happen.

As you can see in the chart below, half of Microsoft’s revenue comes from the US:

Please note that by investing in Microsoft, you are also investing ChatGPT.

Microsoft currently owns 27% of OpenAI.

2. Is management capable?

Satya Nadella is the CEO of Microsoft since 2014.

Nadella joined the company in 1992, leading major projects on building and running cloud computing and development.

It’s great seeing Nadella must own a minimum of 15x his base salary worth of Microsoft stocks.

In 2013, Amy Hood became the CFO. She joined Microsoft in 2002 after finishing her MBA at Harvard University.

Insider ownership is less than 1% (total value: $1.1 billion).

What’s great seeing? Employees would recommend working at Microsoft (high Glassdoor rating):

3. Does the company have a sustainable competitive advantage?

Microsoft is a global leader with a wide moat.

Their competitive advantage is based on high switching costs.

Users and businesses find it costly and difficult to move away from its integrated software and services. This dependency keeps customers loyal to Microsoft.

Microsoft also benefits from other moat sources:

• Intellectual property: Microsoft holds numerous patents and copyrights

• Brand strength: Microsoft has a well-known brand name and strong reputation

• Economies of scale: They produce software and services more efficiently

• Network effects: Windows and Office increase in value as more people use it because of compatibility

• Barriers to entry: Microsoft’s compliance with global regulations creates high barriers to entry

Companies with a sustainable advantage have these qualities:

• Gross Margin: 68.6% (Gross Margin > 40%? ✅)

• Return On Invested Capital (ROIC): 22.0% (ROIC > 15% ✅)

Microsoft is investing heavily in AI.

That’s the main reason why you see a declining ROIC.

We think this number will go up again over time as these investments will yield a return eventually.

4. Is the company active in an attractive end market?

Microsoft is active in attractive end markets for sure.

Here are just a few examples:

• Windows is a clear market leader in the Personal Computing Market. They have a 75% market share with Apple as a major competitor

• The company’s Cloud Services segment is active in a competitive market. Microsoft has a 20% market share in this segment. This market is expected to grow at a CAGR of 16.0% until 2033. Main competitors are Amazon, Google Cloud, Alibaba Cloud and IBM.

• Market leader in the productivity software market (Office, LinkedIn, ..). Google is a major competitor in this segment.

5. What are the main risks for the company?

Here are some of the main risks for Microsoft:

• Intense competition: A lot of competition from other Big Tech companies

• Data security risks: Microsoft is a prime target for cyberattacks and breaches that could damage its reputation

• Rapid advancements in technology (AI): While Microsoft has made major bets on AI through its OpenAI partnership, the pace of innovation means it risks being disrupted

• Regulations: Growing scrutiny from regulators across the US and Europe around antitrust, data privacy, and AI governance

• High valuation levels (see later)

6. Does the company have a healthy balance sheet?

We look at 3 ratios to determine the healthiness of Microsoft’s balance sheet:

• Interest Coverage: 53.2x (Interest Coverage > 15x? ✅)

• Net Debt/FCF: Net Cash Position (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 18.0% (Goodwill/assets not too large? < 20% ✅)

Microsoft’s balance sheet looks healthy.

7. Does the company need a lot of capital to operate?

We prefer to invest in companies with CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.

Microsoft:

• CAPEX/Sales: 27.2% (CAPEX/Sales < 5%? ❌)

• CAPEX/Operating Cash Flow: 51.8% (CAPEX/Operating CF? < 25% ❌)

But wait… Microsoft is investing heavily in future growth.

Remember that there is a difference between Maintenance CAPEX and Growth CAPEX.

• Maintenance CAPEX: Investments made in existing assets

• Growth CAPEX: Investments made in new assets in order to grow

When a company invests a lot in order to grow, its growth CAPEX is very high but these investments might create a lot of value in the long term.

That’s why sometimes (like for Microsoft) it might make sense to only take the company’s Maintenance CAPEX into account.

As a rule of thumb, we state that the company’s maintenance CAPEX is equal to the company’s Depreciation & Amortization.

When we only take Microsoft’s Maintenance CAPEX (without R&D costs) into account, we get the following:

• CAPEX/Sales: 2.8% (CAPEX/Sales < 5%? ✅)

• CAPEX/Operating Cash Flow: 5.3% (CAPEX/Operating CF? < 25% ✅)

These numbers already look way more attractive.

8. Is the company a great capital allocator?

Capital allocation is the most important task of management.

Look for companies that put the money of shareholders to work at attractive rates of return.

Microsoft:

• Return On Equity: 34.4% (ROE > 20%? ✅)

• Return On Invested Capital: 22.0% (ROIC > 15%? ✅)

These numbers look attractive.

9. How profitable is the company?

The higher the profitability of the company, the better.

Here’s what things look like for Microsoft:

• Gross Margin: 68.6% (Gross Margin > 40%? ✅)

• Net Profit Margin: 39.0% (Net Profit Margin > 10%? ✅)

• Average FCF/Net Income past 5 years: 80.4% (FCF/Net Income > 80%? ✅)

Microsoft’s is a very profitable company.

10. Does the company use a lot of Stock-Based Compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably we want SBCs as a % of Net Income to be lower than 4% and certainly below 10%.

Microsoft:

• SBCs as a % of Net Income: 10.3% (SBCs/Net Income < 10%? ❌)

• Avg. SBC as a % of Net Income past 5 years: 11.3% (SBCs/Net Income < 10%? ❌)

As you can see, Microsoft uses quite some Stock-Based Compensation.

This is a cost for shareholders like us. We will take this into our valuation models (see later).

11. Did the company grow at attractive rates in the past?

We look for companies that managed to grow their revenue and EPS by at least 5% and 7% per year respectively.

Microsoft:

• Revenue Growth past 5 years (CAGR): 14.8% (Revenue growth > 5%? ✅)

• Revenue Growth past 10 years (CAGR): 13.2% (Revenue growth > 5%? ✅)

• EPS Growth past 5 years (CAGR): 19.0% (EPS growth > 7%? ✅)

• EPS Growth past 10 years (CAGR): 27.2% (EPS growth > 7%? ✅)

These growth figures look attractive.

12. Does the future look bright?

You want to invest in companies that manage to grow at attractive rates as stock prices tend to follow FCF per share growth over time.

Microsoft:

• Exp. Revenue Growth next 2 years (CAGR): 15.9% (Revenue growth > 5%? ✅)

• Exp. EPS Growth next 2 years (CAGR): 18.0% (EPS growth > 7%? ✅)

• EPS Long-Term Growth Estimate: 13.5% (EPS growth > 7%? ✅)

This outlook looks attractive.

13. Does the company trade at a fair valuation level?

Now let’s dive into the valuation.

It’s very important as even the best company in the world can be a horrible investment if you pay too much for it.

Read more

It offers great investment opportunities.

Let’s dive into how you can handle market volatility and make sound decisions.

Subscribe now

COVID Crash

The COVID crash of 2020 was the fastest market crash in modern history.

Markets plunged, and billions were lost in record time.

The interesting part?

It didn’t just fall fast, it bounced back even faster.

Just six months later, markets were hitting new all-time highs.

Imagine being in a coma, and when you wake up, your other half tells you a global pandemic is taking place.

With a lot of anxiety, you open your broker app to check your stock portfolio…

To your surprise, your portfolio is up +20%.

That’s exactly what happened.

In the chart below, you can clearly spot the COVID crash of March 2020, followed by the lightning-fast rebound for the S&P 500:

The COVID crash proved once again that you can’t time the market.

Dollar-Cost Averaging

You can’t time the market. But you can tame it.

That’s exactly what you do with Dollar-Cost Averaging.

It means regularly investing a part of your income into stocks.

My parents do this every single month on the first Monday of the month, for example.

This way you:

1. Spread your risk

2. Stay calm when markets drop

3. Build real wealth over time

But the market doesn’t always recover as quickly as it did after the COVID crash.

In the first decade of this century, investors were hit by two major crises:

1. The Dot-Com bubble in 2000

2. The global Financial Crisis eight years later.

It wasn’t until 2012 that markets began to recover.

A lump sum of $14,400 in 2000 shrank to $11,181 by 2012.

But if you had invested $100 every month instead (called Dollar-Cost Averaging), you'd have ended up with $16,351.

Dollar-Cost Averaging outperformed lump sum investing by 35.9%.

The lump sum ended up making a loss, while DCA protected your capital through this exceptionally long bear market.

A period like that, 10 years or more without real growth, is what we call a lost decade.

The market may rise, but not enough to outpace inflation.

As shown in the chart above, there have been three lost decades since 1900.

From 1914 to 1945, markets struggled due to two world wars and the 1929 crash.

Between 1973 and 1985, inflation and weak markets left little room for real returns.

Investors need to understand that markets go through ups and downs.

That’s why patience is priceless.

As Charlie Munger famously said:

Just Keep Buying

Between 2000 and 2012, market returns were disappointing.

But what if you stuck with it and kept investing $100 a month in a global ETF from 2012 to 2024?

Your investment would have grown from $28,800 to $88,197.

And this despite the lost decade (2000-2012).

Dollar-Cost Averaging is great because it rewards patience.

The market always recovers eventually.

But patience can be tough when your stocks go nowhere (or even decline).

Investing becomes a mental battle:

• You start to doubt yourself

• Emotions take over

• Discipline fades

• …

Long periods of market struggle can hurt.

But how much?

Let’s introduce you to…

The Kaplan’s Pain Index

Not all crashes feel the same.

A 40% drop stretched over ten years feels very different from a quick COVID crash.

The Kaplan Index measures how painful each stock market crash is:

• Drawdown: The drop from peak to bottom. The deeper it is, the more it hurts.

• Recovery time: How long it takes to recover. The longer it takes, the more it hurts.

Kaplan's formula cuts through the noise. It shows you what a crash actually costs you.

Let's put it to the test with the 2008 Financial Crisis.

Step 1: Use the 1929 market crash as a reference point. This becomes the benchmark = 100% pain.

For the 1929 crash:

• Drawdown (market loss from peak): 79%

• Recovery time: 4.5 years

For the 2008 Financial Crisis:

• Drawdown: 57%

• Recovery time: 5 years

Step 2: Calculate the pain surface

Pain surface = Drawdown (%) × Recovery time (years)

• For 1929: 79 × 4.5 = 355.5

• For 2008: 57 × 5 = 285

Step 3: Compare 2008 to 1929

Kaplan Index 2008 = 285 / 355.5 = 80.2%

Step 4: Conclusion

During the Financial Crisis, investors experienced 80.2% of the pain felt during the 1929 crash.

Let’s now run the same exercise for the COVID crash.

As you can see, the COVID crash scores just 7.1% on Kaplan’s Pain Index.

This is a low score thanks to the rapid recovery.

The table below shows the Kaplan Index for all major crashes since 1920.

Surprisingly, the oil crisis ranks highest.

Markets dropped 48%, but it took eight years to recover.

The oil crisis reveals something important about market pain.

Even though markets fell more sharply during the 1929 crash, the dot-com bubble, and the Financial Crisis, the oil crisis felt more painful.

Kaplan’s formula gives equal weight to depth and recovery time, but investors don’t experience them equally.

Investors suffer most from a long recovery time.

The chart shows various market crashes, along with two hypothetical ones.

The farther up and right, the more painful the crash.

The chart makes it clear: It’s not the crash that hurts, it’s the crawl back.

Conclusion

What can you learn from this as an investor?

It’s not the crash that breaks investors, but the long wait for recovery.

The real risk isn’t the market, it is how you react to it.

Dollar-Cost Averaging seems to be the best solution to protect yourself against market volatility.

By investing every single month, you protect yourself from making emotional investment decisions.

Everything In Life Compounds
Team Compounding Quality
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Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Finchat: Financial data

Disclaimer

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