Pieter Slegers: Compounding Quality: Lessons from the Investing Legends
Mar 4, 2024
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Pieter Slegers, founder of Compounding Quality Newsletter, shares insights on quality investing, finding great businesses led by outstanding managers at fair valuations. The podcast delves into early investing experiences, transitioning to quality investing, and building a long-term portfolio for generations. Learn about learning from mistakes, market expectations, and the importance of humility and success in investing.
Start early in investing to learn from mistakes when stakes are lower.
Quality investing focuses on identifying exceptional companies with competent managers at fair valuations.
Invest in companies with competitive advantages, management alignment, low capital intensity, efficient capital allocation, profitability, and growth potential.
Deep dives
Importance of Compounding and Starting Early
Starting the investment journey at the age of 14, the speaker became intrigued by the concept of compounding, realizing the significance of investing early. Despite an initial investment misstep resulting in a 60% loss, this experience fueled a commitment to learning and improving investment knowledge, emphasizing the value of making mistakes early when the stakes are lower.
Transition to Quality Investing
Transitioning from a value investing approach, the speaker embraced quality investing principles focused on identifying exceptional companies led by competent managers at fair valuations. Employing a three-step strategy inspired by Warren Buffett and Terry Smith, the emphasis shifted towards long-term ownership of outstanding businesses demonstrating competitive advantages.
Essential Characteristics of Quality Stocks
Highlighting six essential characteristics for quality stocks, the speaker emphasized the importance of competitive advantages, management alignment, low capital intensity, efficient capital allocation, strong profitability, and growth potential. By identifying companies with sustainable competitive advantages and management commitment, investors can align with the principles of quality investing.
Modes of Quality Companies
Investing in companies led by their founders or with management having over 10% ownership dramatically aligns incentives with shareholders, as evidenced by academically proven studies. Family and founder-led businesses have historically outperformed by up to 4% per year. Emphasizing the importance of companies with 'modes' and 'skin in the game', combining criteria that contribute to long-term outperformance.
Capital Allocation and Success Metrics
Effective capital allocation, alongside strong return on invested capital, is crucial for quality investing. Options like investing in organic growth, paying down debt, and avoiding value-destructive M&A are key. The quality investor focuses on profitability metrics like gross and profit margins, ensuring translating earnings into free cash flow. Secular trends and growth rates also play a vital role in identifying quality companies.
My guest today is Pieter Slegers, the founder of the world-famous and hugely successful Compounding Quality Newsletter.
Pieter and I missed each at the last year’s Berkshire meeting, but connected soon after. It was Gautam Baid (the author of Joys of Compounding) who in Omaha told me I should chat with Pieter. We had a few wonderful calls since then, and met in person at Guy Spier’s VALUEx in Klosters soon after this recording.
Pieter’s enthusiasm for investing is contagious, his appetite for knowledge inspiring, and his dedication to teaching admirable.
Pieter Slegers studied Financial Management at the KULeuven and graduated summa cum laude. He worked for three years as a Belgian Asset Manager before focusing full-time on his investment newsletter, Compounding Quality. Compounding Quality has more than 350,000 followers across social media and more than 135,000 email subscribers. The goal of the newsletter is to help other investors by focusing on Quality Investing. His investment philosophy can be summarized as follows: find great businesses led by outstanding managers and trade at fair valuation levels (based on the Buffett philosophy).
Pieter is joining us from Belgium, where I spent a year as an exchange student two decades ago and where, at the time, I found Peter Lynch’s book One Up on Wall Street at a tiny, charming English language bookstore.
In the same way Peter Lynch introduced me to investing, my today’s guest inspires many readers, followers, and listeners to explore it, too.
NEVER INVESTMENT ADVICE.
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