Introduction to Mindful Compounding
My Investment Philosophy: Inspired by Chuck Akre, Chris Mayer & Shree Viswanathan
Hi! Welcome to the first post on “Mindful Compounding with Luuk.” In this blog, I’ll dive into topics like investing in high-quality companies, legendary investors, mindful market approaches, and more. I hope you’ll join me on this journey, and that together, we’ll learn a lot!
In this first article, I’ll outline my investing approach, heavily influenced by some of my favorite teachers. I’ll start with key aspects of their philosophies and build toward crafting my own.
1. Chuck Akre
One of my favorite investors, Chuck Akre, describes himself not as a value or growth investor, but as a compounding investor. This means he focuses on companies with the ability to grow in value internally over many years.
Akre is famous for his concept of “The Three-Legged Stool.” It consists of three essential elements for a business to compound in value over the long term:
An ability to generate above-average returns on shareholders’ capital
Opportunities to reinvest capital at high returns
A management team with the skill and judgment to keep compounding value over time, despite competition
In other words: Business, Management, and Reinvestment.
Akre’s goal is to find companies with these three qualities and buy them at fair prices. Once he’s found them, his only requirement is patience—there’s no need to trade in and out.
Akre’s insights stem from the historical average return on U.S. stocks, around 9-10%, aligning with the typical return on owners’ capital. So, to compound capital above that rate (and beat the market) with below-average risk, it’s essential to find businesses with higher-than-average returns on capital.
2. Chris Mayer
Chris Mayer, author of the excellent book 100-Baggers, shares an approach similar to Akre. Like Akre, Mayer believes labels like "value investor" or "growth investor" are limiting. His approach is more about:
“Focusing on the company’s return on capital, their reinvestment ability, and their potential to keep compounding over time.”
Two main characteristics of a high-quality compounder are clear in his view:
High returns on capital (ROCE, ROIC, ROE—depending on the business)
The ability to maintain these returns over the long term
For companies to sustain high returns, they need a strong competitive advantage since high returns typically attract competition, which can drive down profitability.
Mayer also emphasizes other important qualities:
High insider ownership (management has "skin in the game")
A strong balance sheet with little or no debt
Alignment between management and shareholders, as management will allocate a lot of shareholder capital during the holding period (ideally, forever)
3. Shree Viswanathan
Shree considers himself a value investor with a quality focus. He asks four key questions for an ideal investment:
Is it a business I understand? Borrowed conviction is worse than borrowed money.
Is it high-quality?
High returns on capital
Ability to reinvest those high returns back into the business
Is it run by good management?
Honest and competent leaders
Skin in the game
Preferably owner-operated
Is it selling at a fair valuation? It doesn’t have to be cheap—just reasonable.
Shree, too, values quality companies. He references a study titled “Do Stocks Outperform Treasuries,” which found that only 4% of U.S. stocks contribute to all the gains, globally just 3% (!).
Why do 96% (U.S.) or 97% (globally) of stocks underperform? Because of a concept called “reversion to the mean.” High-return businesses attract competition, which reduces their profitability—unless they have a strong competitive advantage (or "moat") to fend it off.
As Peter Thiel said, “Competition is good for capitalism, but not good for capitalists.”
I admire many other investors who have shaped my style and from whom I continue to learn, like Warren Buffett, Charlie Munger, Peter Lynch, Terry Smith, and Thomas Phelps. They’ll definitely be featured in future posts! But for now, I’ve focused on those who have most influenced my mindful compounding philosophy.
4. My Philosophy
I believe in keeping investing simple, making it easier to stay focused. My approach aligns with the clarity favored by the investors mentioned above, and can be summarized in one line:
“I try to invest in great businesses with strong competitive advantages, led by trustworthy management, offering ample reinvestment opportunities at high returns, while ensuring I don’t overpay.”
If I stick to these types of businesses, all I need is… patience. This is where Mindful Compounding comes into play. The biggest challenge investors face is patience, as Munger famously said:
“The big money is not in the buying and selling, but in the waiting.”
That’s why, when legendary investors are asked what they could improve on, they often say, “being more patient.”
5. My Goal
My target is to achieve a minimum 10% compound annual growth rate (CAGR) in my portfolio. This goal spans five-year periods since short-term market fluctuations are inevitable.
I also keep Francois Rochon’s “Rule of 3” in mind:
One-third of the years, the market falls by at least 10%.
One-third of the stocks I buy will underperform.
One-third of the years, I’ll lag behind the index.
This blog will be my record of exploring investing. Although I’ve been at it for a few years, there’s so much more to learn—about investing and life. I’d love it if you joined me on this journey to explore the art of compounding with high-quality companies managed by outstanding people.
Thank you so much for reading!
-
Disclaimer: This analysis is not intended as investment advice but as a personal opinion and can serve as a supplement to your own research. The information is explicitly not intended as advice to buy or sell certain securities or securities products, but to provide an overview of the underlying company/companies. You are solely responsible for the decisions you make regarding your investments.