Have you ever wondered why some equities earn the special designation of quality compounder? It sounds easy when you read about Charlie Munger or Nick Sleep buying Costco and holding it forever. But everyone now knows the Costco story and how great it is. We can buy that great business, but we risk paying the wrong price.
So, what enables such businesses to compound? How can we identify their critical characteristics to improve our odds of buying them at a fair or even low valuation?
I recently had the chance to speak with two high-calibre professional investors who are passionate about doing just this and who spend their time searching the UK market for precisely these situations. These two highly experienced UK equity specialists started their careers in the 1990s at what was Mercury Asset Management and is today BlackRock.
Simon Young, among other things, writes The Curious Compounder Substack, and Mark Wharrier has a varied portfolio, including co-hosting the excellent Business Case podcast and is a colleague of mine on the investment committee at Onward Opportunities Ltd.
In this episode, we discuss Wise and Goodwin as examples of how very different businesses can compound growth. They share key characteristics, such as high return on capital, growth capacity and duration.
Very often, these businesses are founder-led or family-owned, allowing them to pivot when circumstances change and take a considered long-term view about investing.
We also discuss acquisitional compound growth typified by UK-listed Halma and Diploma, or North American-listed Constellation Software. These companies derive their compounding from making serial acquisitions funded from internally generated cash flows.
Finally, we discuss those companies that might earn the serial compounder tag in the years to come.
But of course, as always, none of what you are about to hear is any type of advice, but just for your information and hopefully entertainment. Please take personal financial advice before investing your money in these crazy markets.
With that said, please enjoy my conversation with Mark Wharrier and Simon Young.
Brought to you by Progressive Equity.
