🏰 How to Identify Great Compounders
#QualityTuesday!
It’s #QualityTuesday!
In this series, I’ll teach you 5 things about the stock market in less than 5 minutes.
1️⃣ How to find great stocks
Do you know the secret to great stocks?
They are very profitable and reinvest most of their profit in organic growth.
Growth Rate = High ROIC × High Reinvestment
A Compounding Machine grows its value at rapid rates by reinvesting its profits at high returns.
Two metrics are important:
ROIC: tells you how efficiently a company turns capital into profits
Reinvestment rate: tells you how much of those profits can be reinvested back into growth
Just image a company with a ROIC of 25% reinvests 40% in itself:
Growth Rate = ROIC × High Reinvestment
Growth rate = 25% x 40% = 10%
Now compare that to a company earning 10% ROIC while reinvesting 65% of its earnings:
Growth Rate = ROIC × High Reinvestment
Growth rate = 10% x 65% = 6.5%
Despite reinvesting much more capital, it compounds at only 6.5%.
This is the key difference between average businesses and truly exceptional ones.
You want companies with a high ROIC (> 15%) that reinvest a lot in organic growth.
2️⃣ Book Tip: Principles (Ray Dalio)
Principles by Ray Dalio is an amazing book.
It will teach you three things:
How to think independently
Learn from mistakes
Creating systems for better decisions
I created a full book summary. You can read it here:
3️⃣ One simple investment quote
You know how to get rich? But really rich?
It’s not about a Magic Formula or big secrets.
It’s all about being patient.
Charlie Munger said it best:
4️⃣ Interview Lawrence Cunningham
Do you know Lawrence Cunningham?
He’s a professor and wrote some amazing books about Warren Buffett.
On top of that, he serves in the board of directors of Markel and Constellation Software.
Curious to learn more? Read our interview here.
5️⃣ Stock Pitch: Diploma PLC ($DPLM)
How does the company make money?
Diploma makes money by selling essential, high-margin components for industries like aerospace, medical, and industrial machinery.
They grow profits through organic sales and by acquiring small specialist businesses with recurring revenue.
Diploma acts as the middleman nobody talks about.
When a Boeing engineer needs a specific bolt for a 787, or a hospital needs a sterile valve for an MRI machine, they call a specialist distributor.
Diploma owns hundreds of these niche distributors.
Each one is tiny, local, and deeply embedded in its supply chain.
The best thing?
They buy family-run businesses at 6–8x earnings, leave the founders in charge, and give them full autonomy.
Over time, they cross-sell products, consolidate purchasing, and raise prices by 3-5% every year.
Customers barely notice because these products account for just 0.2% of their total costs.
The result? An incredible 18.9% annual return over the past 34 years.
That’s it for today.
In case you missed it:
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
A high ROIC only helps if the company has somewhere useful to put the next dollar. That second part gets missed a lot.
An article about this crucial topic must be written