COMPOUNDING MACHINES

“The ideal business is one that earns very high returns on capital and that
keeps using lots of capital at those high returns. That becomes a
compounding machine.” Warren Buffett

“We focus effort on the rare long-term high compounders.” Li Lu

"A compounder is a competitively advantaged business that earns

superior returns on invested capital. As cash earnings are reinvested back
into the business, the value of the business grows year after year
compounding our investment. If we buy at a discount to what we believe
the business is worth, we will benefit twofold: by the growth of the
intrinsic value and the market correction for the discount. There are two
key variables when we evaluate a compounder: the competitive advantage
of the business and the discrepancy between intrinsic value and quoted
price. Competitive advantage can be fluid and fleeting, thus having a
deliberate way to qualify this attribute is critical to success in this
category." Christopher Begg

“The compounding machine stocks are the Holy Grail of investment.”

Mohnish Pabrai

“At our firm we spend nearly every waking hour trying to identify what we
refer to as 'compounding machines'.” Chuck Akre

“To his son, [Shelby] Davis passed along his infectious passion for owning
shares in carefully chosen companies (he called them “compounding
machines’), his conviction that owning the best compounding
machines would lead to unimagined rewards, his distrust of unnecessary
spending (why waste money they could be invested?), and his workaholic
tendencies.” The Davis Dynasty
“What we learned is that if you buy a good and sustainable business, then
over time the return of that business will do the natural compounding for
you.” William Browne

“We expect most or our return to come from compounding of intrinsic

value rather than a return to intrinsic value.” Ira Rothberg

“Discounts to asset value are not enough, in the long run you need
earnings to be able to sustain and nurture the corporate values.” Peter
Cundill

"The three areas of analysis – business, management, and reinvestment –

are the key components of what we call our “three-legged stool.” When we
find a business that satisfies all three of our requirements, we refer to it as a
“compounding machine,” and we seek to purchase shares at a modest
valuation." Chuck Akre

“I think it is always better to buy compounders, it’s always better to buy

growth. If you are buying an asset because it’s cheap your upside is limited.
Buying cheap assets in my opinion, it’s not the name of the game. You want
to get to high growth, where intrinsic value increases over time." Mohnish
Pabrai

“Compounders are generally market leaders, with high barriers to entry

and high returns on capital, whose intrinsic values are growing at a
healthy rate. The reason they can be mispriced is typically a function of
time horizon. When investor’s don’t focus on the distant
compounding merit of a great business, they may not assign that merit a
fair value.” Christopher Begg

“Our strategy is to own high quality, modestly valued business over many
years, to take advantage of the power of compounding as earnings grow.
To do that successfully only works if we avoid mistakes – unforced errors –
that interrupt the power of compounding.” Ira Rothberg
"From our vantage point, the debate around what is value (e.g. the index,
the factor, sectors) versus growth loses sight of our aim to identify
compounders of value." Dan Loeb

“If you’re going to own a company for a long time, the earnings it generates
today will be a small component of the eventual return. Much more
important will be how those earnings can be reinvested over time to build
value. When companies with positive compounding characteristics
become available at really attractive prices, we’ll hope to take advantage.”
Chris Davis

“A penny doubled every day for a month turns into $10.7m, that’s the effect
of compounding. When we are looking for businesses that can do this we
are looking for businesses that can reinvest their free cash flow back in the
business to continue to earn above average rates of return on that capital
and therefore compound the owners capital.” Chuck Akre [on
compounding machines]

"What I have learnt is don’t sell the compounders when they get fully
priced or they get over-priced. Only sell the compounders when its
absolutely obvious to you that is’t egregiously priced. The big money is in
riding the compounders but you have to try to get in at a reasonable
valuation and you have to be right on the fact they are compounders. It’s a
forgiving business, so you can be wrong quite a few times and still be ok. It
was a difficult lesson for a cheapstake for me. It was a very difficult lesson
for Warren and Charlie. I think they learnt the lesson from See’s Candy,
that was a seminal lesson for them." Mohnish Pabrai

“Some of our biggest mistakes have been in selling down positions in great
businesses when we thought they were fairly valued, or even a bit
overvalued. In our experience, compounders tend to keep compounding,
so we’re slow to sell unless something in the business or company has
fundamentally changed or if the valuation has just become extreme." Peter
Keefe

“If we have identified a great business, a compounding machine that

we’ve purchased well, we want not to interrupt that compounding
unnecessarily by curtailing it with a sell target. We want these businesses
to continue to compound and we want to own that as long as they
continue to be exceptional. So no sell targets, only buy targets.” John Neff,
Akre