Compounding Quality shares his portfolio with 100% transparency.
All investable assets of Compounding Quality are invested in this portfolio and you can follow all transactions 24/7.
The basics are visualized here:
The essence of the portfolio
The essence of the portfolio is very simple: we want to invest in the best companies in the world.
These Compounding Machines have a healthy balance sheet, high profitability, great capital allocation skills, and plenty of reinvestment opportunities.
In general, the portfolio will consist of 3 buckets:
Family companies or companies that are still run by their founder
This will be the majority of the portfolio
Academic studies found that family companies and founder-led companies outperform the S&P500 with 3.7% per year and 3.9% per year respectively
“Some of our key managers are independently wealthy. They work because they love what they do and relish the thrill of outstanding performance. They unfailingly think like owners. It’s the highest compliment we can pay a manager.” - Warren Buffett
Monopolies and oligopolies
Only one or a few companies dominate the entire industry
Monopolies and oligopolies are usually great investment because they are able to operate at attractive conditions due to the lack of competition
“Over the years, Buffett followed his philosophy of buying into industries with little competition. If he can’t buy a monopoly, he’ll buy a duopoly. And if he can’t buy a duopoly, he’ll settle for an oligopoly.” - The Myth of Capitalism (book)
Quality stocks which heavily buy back their own shares
When the outstanding shares decrease, your stake in the company increases
“Pay close attention to the cannibals.” - Charlie Munger
The goal of the portfolio?
Outperform the S&P500 with more than 3% in the long term (> 5 years).
It’s important to highlight that Compounding Quality is never aiming for the highest return. We’re aiming for consistency and doing above average for very long periods of time.
While Wall Street likes to think in quarters, we like to think in quarter decades.
Here’s what Jeff Bezos has to say about this topic:
The characteristics of the portfolio
✅ The portfolio will invest worldwide (developed countries only)
✅ The portfolio will consist of 15-20 names
✅ The portfolio will try to invest in the best companies in the world
✅ We won’t trade a lot. Actvity and costs harm your investment results
✅ We won’t try to time the market (I’m way too dumb to do that)
✅ The characteristics of companies in the portfolio:
Sustainable competitive advantage
Integer management with skin in the game
Healthy balance sheet
Low capital intensity
Good capital allocation
Plenty of reinvestment opportunities
Trading at a fair valuation
“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” - Warren Buffett
Last but not least, it’s important to highlight that the greatest treat you face as investor is yourself.
Investing is a marathon, not a sprint. That’s why, just like Warren Buffett, we’ll never trade a good night of sleep for a shot at a few extra percentage points of return.
Did you know that besides Charlie Munger and Warren Buffett, Berkshire Hathaway had a third partner in the 60s? His name is Rick Guerin and Buffett once stated that he was way smarter than Charlie and himself.
If he’s smarter, why didn’t he become as succesful as Charlie and Warren?
The answer is that he wanted to get rich quick. Guerin used leverage to invest and was wiped out completely in 1973-1974.
In recent days, people have rightly asked questions about the track record of Compounding Quality.
I love questions like this as it shows that people are doing their homework.
The Fund I co-managed together with a colleague
It’s hard to prove the track record of a Fund when you want to stay anonymous, isn’t it?
For this one you need to take my word: the Fund I managed outperformed its peers with 3% per year on average.
My own portfolio
Since I started working for my last employer, I tracked my personal portfolio in Bloomberg.
Results since the beginning of 2020:
CAGR Portfolio: +18.7%
CAGR S&P500: +11.8%
Investable universe Compounding Quality
Compounding Quality’s investable universe consists of 150 stocks which are considered as ‘high quality’.
When you create an equal weighted portfolio with these 150 companies, you get the following results since 2011:
CAGR investable universe: +21.0% (+1100%)
CAGR S&P 500 +9.6% (+214%)
Do I think that the investable universe will be able to outperform the index with 12% in the future? Absolutely NOT.
However, it shows you that the strategy has worked in the past.
The track record shown above is why I’m comfortable to state that we should be able outperform the index with 3% per year in the long term.
Now let’s dive into the Portfolio: