Own the Compounders

Our strategy is to compound our capital at an above-average rate and at a below-average risk. The way we hope to do so is by identifying what we call our compounding machines. We know that periodically the market will both overvalue and undervalue the businesses we own. Let us talk about the case of them being overvalued. If the business model is intact and if people’s behaviour is the kind of thing that we respect and if the re-investment opportunities and the historical record continue to be terrific, then we rarely sell something simply because it has become expensive.

The reason is that the really good ones are hard to find. Remember, that we run concentrated portfolios; we do not want to own lots of things. We want to own exceptional things, and the really good ones are hard to find. That is the reason that we often hold things for the very long period.

Will I be better off if I sold them at the top and bought them at the bottom? Of course! Am I able to tell when that is going to be? No. My life experience is that if the stock is at $40 and I think it is worth $25 and I sell it at $40 because I want to buy it back at $25, it trades down to $25.05 and then goes to $300 and I don’t ever get my position back. Therefore, we are always trying to make sure that we own the compounders.-said Charles Akre

3 replies on “Own the Compounders”

I never knew how to put this in words until I read this, well I at the first place wanted to put it in words just to express what I do for a living. 🙂

A strong case for compounders. Have query: Colgate Palmolive is a great compounder- over 90/100% ROCE/ROE for decades. However, PE is well over 40, Sales/Profit CAGR just around 10%, and, distributes almost 70/80% of profit as dividend, i.e. does not have growth avenues for retained earnings. In the last few years, stock price more than tripled. How will you treat this compounding machine?

Colgate, having a 90/100% ROCE/ROE, available at 40 PE. The answer lies in the Sales/Profit CAGR at 10%. If this Sales/Profit CAGR increases to say, 15% or 20% while maintaining the same ROCE/ROE at 90/100%, it will not be available at 40 PE. Then, it would command a PE of more than 50 or even 60. So, it is a great company, but does not have great future growth potential.

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