Hi Partner 👋

This is Part III of our extensive Portfolio Update:

• Part I: Showing why we expect a return of 17-18% per year going forward

• Part II: Go over every single stock in Our Portfolio + Potential switches

• Part III (today): making a switch in Our Portfolio

We will sell a company that is struggling right now.

And we will buy a company with an expected return of 22% (!) per year.

Position Switch

Today, it’s time to make a position switch.

A few more will probably follow going forward.

You are looking for the reasoning about why we are making some changes? Please read this article.

We will sell one company and use the proceeds to buy more of an amazing company we already own.

I’m sorry... I f*cked up

When I am making a Portfolio change, the first thing I should do is apologize to you.

Why?

There is one major reason why we are selling a stock: the investment case is no longer intact.

Because when the stock would still do well, there would be no reason to make a change.

The only valid reason to sell a quality stock?
One of the most wonderful companies in the world?

When you notice you were wrong.

The investment thesis is no longer intact and the company is losing (some of) its moat.

Today it’s time to sell a stock in Our Portfolio as I think there are better opportunities elsewhere.

And that’s why I want to apologize to you.

I made a mistake and I’m taking full responsibility for it.

Unfortunately, making mistakes is part of the game.

We should always keep the rule of three from François Rochon in mind:

• One year out of three, the stock market will go down at least 10%

• One stock out of three that we buy will be a disappointment

• One year out of three, we will underperform the index

As Peter Lynch said:

However, this doesn’t mean I don’t feel bad about this.

I feel personally responsible.

That’s why I will try to share the key leanings with you.

Here’s what we’ll do:

• We are selling one company

• We are using the proceeds to add to another company with more upside potential

Let’s dive into the company names.

Read more

Hi Partner 👋

On Tuesday, we went over the Portfolio.

You learned the following:

• The expected return for Our Portfolio is 17-18% per year depending on your calculation method

• We want to make some Portfolio Changes going forward

Today we will run over every single position in Our Portfolio.

We will also outline which changes we would like to make.

Every position

Let’s now take a deeper look at every position in the Portfolio.

I’ll try to go over every single company in one sentence to make it easy for you.

Let’s work with colors:

• Green: High conviction

• Yellow: Medium conviction - Should we consider trimming?

• Red: Low conviction - Should we consider selling this company?

Let’s dive in.

Strong convictions

• Medpace: Medpace is one of the highest quality names in Our Portfolio.

• Ameriprise Financial: Spin-off from AMEX. A great business.

• Visa: One of the best ‘tollroad businesses’ in the world.

Read more

Hi Partner 👋

I hope you are doing well.

This week, we’ll take a skeptical look at our portfolio.

What is going well?
What is not going well?
Should we make adjustments?

The goal? Have a Portfolio you can be proud of.

We might need to make a few adjustments to achieve this.

This will be a very open and honest article.

It will help you to know what to expect from Compounding Quality going forward.

Our Portfolio

Currently, we are invested in 21 companies.

We invest in three buckets:

• Owner-Operators (65.7% of the Portfolio):

  • What? Companies still run by their founder or their family

  • Why? Founder-led companies outperform by 3.9% per year on average

• Monopolies & Oligopolies (27.8%):

  • What? Only one or a few companies dominate the entire industry

  • Why? The best compounders in the world are monopolies & oligopolies

• Cannibal stocks (6.5%):

  • What? Quality stocks which heavily buy back their own shares

  • Why? Cheap cannibal stocks can create a lot of shareholder value.

If you want to find out more, I would highly recommend you reading our Owner’s Manual.

The Owner’s Manual was already written in 2023 and is still highly relevant today.

The goal is to outperform the S&P 500 by 3% per year in the long term.

I believe we can achieve this:

1. We are invested in better companies than the index

2. Our companies are cheaper than the index

Quality investing is a strategy that has proven to work in the past. And it will continue to do so in the future.

As Mark Twain said: History doesn’t repeat itself, but it often rhymes.

Free Cash Flow

Our goal?

Let our portfolio generate more and more free cash flow for us over the years.

The goal? Generate $1 in Free Cash Flow for us per minute.

That would be true passive income!

Here’s what the evolution over the past few years looks like:

I’m very happy with this trend.

Under the assumption that we keep adding $50.000 per month and that the intrinsic value of our companies compounds by 12% per year…

… Here’s what the future trajectory looks like:

This would mean our goal of generating $1 in Free Cash Flow per minute would be reached in 2032.

In our last Portfolio Update (July 2026), we mentioned Our Portfolio was making $96,156 in Free Cash Flow for us.

Today Our Portfolio generates $106,000 in Free Cash Flow.

The trend is clear: up.
(Please note that adding to Our Portfolio every single month definitely helps).

Here’s what Our Portfolio makes for us today:

• Per year: $106.119

• Per month: $8.843

• Per week: $2.035

• Per day: $290.7

• Per hour: $12.1

• Per minute: $0.20

Now let’s look at every single position in Our Portfolio.

The breakdown per position looks as follows:

Read more

Hi Partner 👋

It’s time for the Best Best Buys of the month today.

These are our favorite stocks that aren’t in Our Portfolio yet.

In other words: these stocks are the most likely to be added to the Portfolio.

Subscribe now

Past month

In the past month, the S&P 500 rose by +3.6%:

Investors are ‘Neutral’ today according to the Fear & Greed Index:

Best & Worst Performers

This overview shows you the best and worst performers in our investable universe.

Worst performers

The cheaper we can buy great companies, the better.

Here are the worst performers of the past month:

Best performers

These stocks did well over the past month:

❄️ Spotlight: Watsco ($WSO)

Watsco is active in three segments:

• HVAC Equipment: Residential central air conditioners, heat pumps, furnaces, and commercial heating and cooling systems.

• Other HVAC Products: Everything a contractor needs to install, maintain, or repair a system. It covers replacement parts (like motors, coils, and compressors), thermostats, ductwork, copper tubing, refrigerants, insulation, tape, and tools.

• Commercial Refrigeration: Walk-in coolers, freezers, ice machines, and supermarket refrigeration systems used primarily by restaurants, grocery stores, and the food/beverage industry.

The revenue split looks as follows:

What’s interesting?

70%-80% of sales are emergency replacements & repairs.

This means these sales are at least somewhat recurring.

When something breaks down, the most important thing for contractors is how easily and quickly they can get the parts, not what they cost.

One of Watsco’s biggest advantages is its digital platforms.

They help contractors:

1. Find and order the right parts

2. Create quotes for customers

3. Complete more jobs

This helps contractors increase their profits.

Today, e-commerce sales generate one third of their total revenue:

More Room to Grow

Beyond its e-commerce platforms, Watsco has several other advantages.

Watsco is a large serial acquirer active in a highly fragmented industry:

• They sell about 1 in 5 residential systems.

• There are 2,000+ regional distributors in North America.

• Watsco isn’t even active in all 50 states yet

Management sees Watsco as a business that’s still being built.

I think they’re right.

Fundamentals

The fundamentals of Watsco look very strong:

✅ Asset-Light: Watsco requires almost no capital to operate
✅ Balance Sheet: They have very little debt
✅ ROIC: Consistently generates 15%+ Return on Invested Capital
✅ Value creation: The stock is up nearly 12,000% since 1990.

At the same time, Watsco is down over 45% from its peak:

The market doesn’t like that revenue and net income have fallen over the past few years:

However, this isn’t a problem with the underlying business.

Instead, three temporary headwinds hit at the same time:

• COVID Pull-Forward: High demand during the pandemic made sales unusually strong. Dealers also ordered too much inventory and had to work through it when demand returned to normal.

• A2L Refrigerant Transition: The switch to new refrigerants disrupted supply chains and temporarily boosted demand.

• OEM Pricing Normalization: Manufacturers raised prices sharply after the pandemic. This temporarily boosted Watsco’s sales and profit margins.

Management has long-term targets of $10 billion in revenue and 30% gross margins.

If we assume a 8% Net Profit Margin is realistic, this would translate into $800 million in Net Income.

At a FWD PE of 25x, this means the company should be worth $20 billion ($800 million x 25) by then.

That’s an upside potential of 56% compared to the current stock price.

Best Buys August 2026

Let’s now dive into our five favorite buys for the month.

These are our favorite stocks that aren’t in Our Portfolio today.

In other words: these stocks are the most likely to be added to the Portfolio right now.

As a reminder, you have access to Our Portfolio here.

5. Hermès International ($RMS.PA)

Hermès runs on exclusivity.

They intentionally make fewer products than customers want.

This means they don’t need to offer discounts, sell through outlets, or hold excess inventory.

As a result the company operates at very high margins.

Demand for Hermès bags is so high that pre-owned bags often sell for more than new ones.

Would you pay $42.700 for a handbag?!

Another thing we love?

The founding family controls more than 65% of the equity.

This gives them serious skin-in-the game.

It’s a strong incentive to protect the brand equity that has been built over generations.

In 2026, Revenue and Net Income has slowed a little bit:

As a result, the stock is down nearly 30%:

But much of the slower growth comes from currency headwinds.

On a constant-currency basis, the underlying business is still growing.

To summarize:

• Hermès is one of the strongest brands in the world

• It’s family-run

• Incredibly profitable

• After years of being very expensive, the valuation e is finally coming down to more reasonable levels

4. Canadian National Railway ($CNI / $CNR.TO)

The most interesting thing? Railways are natural monopolies.

Because of the cost of land, zoning restrictions, and environmental permits, no new competitor will ever be built.

Trains are also the cheapest way to move heavy freight.

They use 4x less fuel than shipping by truck, which gives them a huge cost advantage.

If you need to move heavy goods long distances by land, you’ll use trains whenever possible.

That’s why Canadian National Railway has been able to raise freight rates at or above inflation through different economic cycles.

However, freight volumes have been falling for the past few years.

Luckily, CNR has been able to keep making their railroad more efficient.

That’s why management just raised guidance on their Q2 earnings call.

For long-term investors, this might be an interesting time to look at CNR.

The company will seriously benefit from any improvement in North American freight volumes.

Management has historically returned a lot of cash to shareholders.

This through both dividends and buybacks.

Now let’s dive into the top 3.

Read more

Hi Partner 👋

As you might know, we recently added Fairfax Financial ($FFH) to Our Portfolio.

One of the biggest reasons we bought it?

It’s an easy way to invest in one of the world’s most attractive growth markets: India.

Fairfax’s investment portfolio is worth roughly $75 billion, with $4.3 billion already invested in India.

In other words, about 5.7% of …

Read more

Hi Partner 👋

I hope you are doing well.

Recently, I did something I had never ever done in my adult life.

I took a holiday of two (!) weeks.

I spent a few days with my girlfriend in the Netherlands and Belgium, before going to Greece (Crete) for a week.

Besides having fun, this trip provided some great investment and life lessons.

Let’s share them with you today.

Not a Partner yet? Join us this Thursday in a Free Masterclass:

Register for the webinar

The Greece Trip

During this two week period, I barely worked (maybe 1-2 hours per day).

We visited the city of Heraklion, went to Santorini and had a few lazy days at the pool.

Before taking this holiday, I was a little bit afraid:

1. What would happen with Compounding Quality? Would Partners become upset for me taking a holiday?

2. What will happen to Our Portfolio? As we were in the midst of results season?

In hindsight, I had nothing to worry about.

1. Partners were very understanding. Some even encouraged me to take a holiday

2. During the period that I was away, the Portfolio performed really well

It resulted in me making this statement in the Community:

I truly feel we are very well positioned with Our Portfolio today.

You see a clear trend nowadays:

• When AI and semiconductors outperform, Our Portfolio underperforms

• When AI and semiconductors underperform, Our Portfolio outperforms

I believe the market is overvaluing AI and semiconductors.

Just look at this chart:

Over the past few weeks, Our Portfolio started outperforming the market.

I think this trend will continue over the next 1-2 years.

However, please note that we make no attempt (at all) to try and time the market.

I don’t care much about market sentiment.

Why? Because I know that stock prices will follow the evolution of the intrinsic value eventually.

What you should care about?

The Free Cash Flow your portfolio is generating for you.

Here’s what the evolution looks like:

As you can see, our companies are generating more and more Free Cash Flow for us.

My personal goal? Generate $1 in Free Cash Flow per minute with Our Portfolio.

Why? You should try to find a way to make money while you sleep.

Because if you don’t, you’ll work until you die.

If we can make $1 in FCF per minute, this would mean we make the following:

• $1 per minute

• $60 per hour

• $1.440 per day

• $43.200 per month

• $518.400 per year

If the companies you own generate $43,200 in Free Cash Flow every month, I think it’s fair to say you’ve achieved true financial independence.

Financial independence means being able to do what you want, whenever you want, with whoever you want.

Reaching this goal will take a while, but we will get there eventually.

Personally, I don’t share the real dollar amounts I invest in the Portfolio.

But I use exactly the same percentage weights as shown in the Portfolio Spreadsheet.

The Compounding Quality Portfolio is currently worth $1.9 million.

• If my personal portfolio would be worth $950.000, I buy half the quantity of every stock shown in the spreadsheet.

• If my personal portfolio would be worth $3.8 million, I buy twice the quantity of every stock shown in the spreadsheet.

The goal is to outperform the S&P 500 by 3% per year in the long term.

To achieve this, we would probably need a return of 12% per year.

The power of compounding is something beautiful.

He/she who understands it, earns it.
He/she who doesn’t, pays it.

I am about to turn 30 years old in November this year.

Let’s just say my portfolio is actually worth $1.8 million…

… This is how much we would have going forward at a 12% per year return:

• In 10 years: $5.6 million

• In 20 years: $17.4 million

• In 30 years: $53.9 million

• In 40 years: $167.5 million

• In 50 years: $520.2 million

• In 60 years: $1.6 billion

• In 66 years (at same age as Warren Buffett’s): $5.0 billion

That’s the true power of compounding.
It’s very hard for humans to understand the power of exponential growth.

The key takeaway?

If you compound well and you live a long & healthy live you could actually become a billionaire.

And things get even better.

What if we would periodically add $50.000 per month to Our Portfolio?

In that case the situation looks as follows:

• In 10 years: $17.0 million

• In 20 years: $66.8 million

• In 30 years: $228.7 million

• In 40 years: $755.7 million

• In 50 years: $2.4 billion

• In 60 years: $8.1 billion

• In 66 years: $26.3 billion

You could draw two key lessons from this:

1. Be patient and let the power of compounding do its work for you

2. Don’t make huge mistakes and stay in the game

You can do the calculations for your own portfolio via this spreadsheet*:

Compound interst calculator

*Please note that you need to download the spreadsheet first to Excel in order for it to work.

So now you know Our Portfolio is generating a lot of Free Cash Flow for us.

What makes it even better?

At the same time Our Portfolio is trading at its cheapest valuation level ever:

The expected growth in Owners Earnings for Our Portfolio over the next 3 years equals 13.1%.

And because Our Portfolio is trading at its lowest valuation ever, your actual return could be even higher.

I don’t think a 15% annual return over the next 3 years is unrealistic.

Two extra lessons

Two extra lessons I took away from the Greece trip?

1. When in doubt, zoom out

2. It’s all about love

When in doubt, zoom out

Barely working for 2 weeks truly helped me to become a better investor.

I came back from this trip feeling refreshed, full of new ideas for the Portfolio.

They will be implemented going forward.

When you’re in the midst of something, sometimes it’s hard to see the bigger picture.

My best ideas always come to me when I’m not working (in the shower, while working out, …).

Stepping away from your daily routine can help you tremendously to be a better human being and investor.

I truly feel this Greece trip made me Richer, Wiser & Happier.

It’s all about love

Investing is all about delayed gratification.

Why are you working so hard?
What are you saving for?
Who are you doing this for in the end?

Investing is a beautiful way to get incredibly wealthy. But don’t forget to live a little bit along the way.

In the end there are only two things that matter:

• How much love you gave

• How much love you received

Here are the top 5 regrets of people on their deathbed:

The ultimate measure of success in life?

It’s not how much wealth you have.

It’s how many of the people you’d want to love you, actually do.

Conclusion

Here are the key takeaways from today:

• Take a break. Stepping away can make you a better investor (and human being).

• Trust compounding. Time and patience can turn thousands into millions.

• Focus on cash flow. Ignore short-term market noise.

• Avoid big mistakes. Stay invested and let compounding work for you.

• Don’t forget to live. Wealth matters, but love matters more.

Talk to you on Thursday!

Everything In Life Compounds
Pieter
PS You are not a Partner yet? Join us this Thursday on a free live masterclass. You can register here.

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

It’s time to update our watchlist.

The Buy-Hold-Sell List helps you track Our Investable Universe and find great businesses at attractive prices.

Let’s take a look at some amazing investment opportunities.

Subscribe now

From tech to rocks

Chris Hohn is one of the best investors in the world.

His hedge fund, TCI made almost $20 billion (!) last year.

He only invests in businesses that control essential pieces of the economy (tollroad companies).

You can learn everything about him here.

TCI just updated its holdings for the second quarter.

Sir Chris Hohn made a big move:

• TCI fully exited its position in Microsoft

• It built large positions in Martin Marietta ($MLM) and Vulcan Materials ($VMC).

At the end of 2025, Microsoft was the third largest holding of TCI.

If you’ve never heard of Martin Marietta and Vulcan Materials, I wouldn't be surprised.

They are the two largest produces of aggregates (things like gravel, crushed stone, and sand) in the U.S.

Why is one of the world’s top investors dumping one of the biggest tech companies in the world to buy rocks and gravel?

It’s actually very simple: the moat.

Hohn said that he thinks AI could disrupt Office and Azure faster than the market thinks.

AI will have a very hard time disrupting a gravel pit.

The more boring the better?

Have you ever read One Up On Wall Street?

Peter Lynch told us exactly why gravel pits have a strong moat:

Rocks, sand, and gravel are cheap commodities on their own.
They can sell for just a few dollars per ton.

The real moat for an aggregates business is its location.

These companies are essentially local tollbooths. And that’s a business model Chris Hohn loves.

Here’s one more example of how boring businesses can deliver exciting returns.

Can you guess which stock delivered the highest return between 1925 and 2023?

If you guessed Martin Marietta or Vulcan Materials, I’m sorry to say you’re wrong.

It was Altria, the company behind Marlboro cigarettes, with a return of more than 16% per year.

And number 2? Just after Altria?

It’s Vulcan.

Compounding is the most powerful force in the world. But it takes time to work.

That means the businesses you invest in need to survive and grow for decades.

For Quality investors like us, the moat is extremely important.

Update Buy-Hold-Sell List: July 2026

Our Buy-Hold-Sell List is packed with durable, high-quality businesses.

While Mr. Market is distracted by AI and momentum stocks, some of these businesses are trading at very attractive prices.

Let’s review the list and see what opportunities Mr. Market is offering us today.

Worst performers

Here are the 10 worst performers on our watchlist so far this year:

Best performers

The 10 best performers look as follows:

Changes to the Buy-Hold-Sell list

This week, we made some changes to our Buy-Hold-Sell List.

We moved 3 companies from HOLD to BUY:

• Alphabet ($GOOGL): Google's parent company focused on internet search, AI, and digital advertising

• Hermès ($RMS): French luxury goods manufacturer

• Teqnion ($TEQ): Swedish industrial conglomerate

2 companies went from BUY to HOLD due to increasing competition:

• Dino Polska ($DNP): Polish grocery retail chain

• Novo Nordisk ($NVO): Pharmaceutical company focused on insulin and GLP-1 drugs

1 company moved from HOLD to SELL due to valuation concerns:

• Williams-Sonoma ($WSM): Home furnishings and kitchenwares retailer

Currently there are 55 stocks on ‘Buy’.

You can download the entire Buy-Hold-Sell List here:

Read more

The recommendation of Warren Buffett?

Most investors are better off buying the S&P 500.

But not every company in the S&P 500 is a good investment.

Let’s teach you how you can share the good from the bad.

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Only a few stocks matter

The S&P 500 has delivered an average annual return of 10% over the long term:

But you know what’s interesting?

Hendrick Bessembinder looked at nearly 100 years of stock returns.

Here’s what he found:

• The average cumulative return was +22,840%

• The median cumulative return was -7.41%

How can this be?

Because a very small number of stocks generate almost all market returns:

Buying a standard market-cap weighted index like the S&P 500 means you buy everything.

You get the highly profitable compounders, but you’re also buying the companies destroying capital.

As Quality Investors, we only want the best of the best.

What is quality?

You can define quality in several ways.

But there are a few general ideas that most of them have in common.

High reinvestment

In the long run, a stock is a slave to its business.

Not to sentiment. Not to macro. Not to the news cycle.

Eventually, a stock will always follow the fundamentals of the business.

That’s why you want to buy companies that can reinvest their own capital at high rates of return.

Here’s what Charlie Munger has to say about this topic:

As you can see in this chart, the companies with the highest Return On Equity (ROE) generate the highest returns:

Low leverage

You want to own companies for a long time.
Let compounding do the heavy lifting for you.

As a result, you want to invest in companies that can survive for a very long time.

One thing that can hurt a business faster than almost anything else?

Too much debt.

Let’s turn to Charlie Munger for some more wisdom:

When times are good, too much debt eats into your profits because you have to pay a lot of interest.

But when there’s a recession, rates go up, or credit tightens, too much debt can bankrupt a company (and wipe out equity investors like us).

As you can see in this chart, having little debt doesn’t necessarily boost your returns. But having too much debt can seriously hurt them.

Real earnings

Accounting rules leave room for judgment, adjustments, and assumptions.

Sometimes, management teams use this to make a struggling business look much more profitable than it really is.

But you can’t fake cash in the bank.

Always remember:

Quality companies make real profits and generate real cash.

Over the long run, a stock’s price follows the performance of the business.

But when it comes to cash generation, this can happen in the short term too.

Here’s the average annual return of companies with negative cash flow and accounting earnings:

The conclusion?

Companies with negative cash flow and earnings usually deliver negative stock returns too.

As an investor, you want to make sure the cash flowing in and out of a business matches its reported earnings.

When the two are close, you know you’re buying a business that makes real money.

So wouldn’t it be interesting to start with the S&P 500 and filter it down to the 100 highest-quality companies?

Companies that translate all their net income into pure cash?

That’s exactly what this month’s ETF does.

⭐ ETF of the Month (Spotlight)

Invesco S&P 500 Quality ETF (SPHQ)

Key Information

• Name: Invesco S&P 500 Quality ETF

• Ticker: SPHQ

• Total Expense Ratio: 0.21%

• Physical/Synthetic ETF: Physical

• ISIN: US46137V2410

European Version

• Ticker: SPQA

• ISIN: IE000E6TPCH9

What?

The ETF starts with the S&P 500 Index.

It then looks at three things:

1. Return on Equity (ROE): Shows how well a company turns shareholders’ money into profit.

2. Financial Leverage: Shows how much a company relies on debt.

3. Accruals Ratio: Shows how much of a company’s earnings are backed by real cash flow rather than accounting adjustments.

It uses these three metrics to give each of the 500 companies a quality score.

It then keeps only the 100 companies with the highest scores.

Finally, it weights each company based on its quality score and market capitalization.

Why?

When you find companies that can reinvest at attractive rates, grow without taking on too much debt, and turn most of their earnings into cash, you’ve found Quality Companies.

And when you invest in Quality Companies, you can expect to outperform over the long run.

Here’s what the historical performance looks like:

Sector Split

The sector breakdown looks like this.

The three largest sectors are Information Technology (42.5%), Industrials (18.9%), and Financials (15.3%).

Top Holdings

The top 10 positions right now:

ETF Portfolio Update: August 2026

Now, let’s dive into our ETF Portfolio Update.

Our Portfolio is a great mix of ETFs that we believe can outperform over the long run.

We use several factors that have historically performed well:

👑 Quality: Only invest in companies that have already won
📏 Size: The smaller the better
🚀 Multifactor: Quality, size, value & momentum
🌏 Emerging Markets: Small exposure to Emerging Markets

Let’s now dive into the ETF Portfolio itself.

You have 24/7 access to the ETF Portfolio here:

Read more

Hi Partner,

Last week you were able to read Part I of our interview with Kris.

Kris is the best growth investor I know.

He even made a bet with me that Nvidia was undervalued… 3 years ago.

Everybody was already convinced that Nvidia was overvalued. Kris wasn’t.

Nvidia is up almost +400% since then.

Let’s dive into Part II of this interview right away!

Kris just announced his 5 favorite stocks right now.

Curious? Download them for free:

Download the top 5

What are the most important metrics or ratios to take into account for growth investors?

Kris: It’s pretty simple: revenue growth. Look at the long-term statistics and you will see that revenue growth is by far the most important driver of stock returns over the long term. Over a year, it’s valuation. But that only counts for 5% over a decade.

Of course, growth alone is not enough. It’s easy to grow revenue fast if you sell $1 for 90 cents. So you want profitability moving in the right direction. But that doesn’t mean I shy away from unprofitable companies. There are tests to see if an unprofitable company is a good company or not.

My favorite is the rule of 40, which comes from the venture capital world: revenue growth plus free cash flow margin should be above 40. Suppose a company grows revenue by 60% with a free cash flow margin of minus 10%. That’s a rule of 50 and that’s really strong. I would definitely be interested in that company, even if it still loses money.

What would be a reason to sell a position?

Kris: The most important reason is simple: the company doesn’t execute as I want it to execute. That doesn’t mean I sell for every mistake. Every company makes them. You have to be a bit tolerant. But blind tolerance is just hoping, and hope is not a strategy, as we all know.

That’s why I have my self-developed Selling Rules that are very company-specific. I determine beforehand when I will trim or sell. Of course, I don’t follow them blindly, as there are always situations in which you should divert from the rules. Suppose a selling rule is at least 15% revenue growth and the company only grows its revenue by 8% but guides for 25% revenue growth in the next quarter, selling would be stupid.

Next to the Selling Rules, I have also developed a Quality Score. Every quarter, I go through the earnings in an earnings deep dive, and then I score the company on 17 criteria, from quality of management and revenue growth to metrics I’ve developed myself, like sales efficiency scores. This catches slow deterioration in companies, which you don’t always see if you don’t score. If the Quality Score is dropping and too low, or the Selling Rules are broken, I consider selling. But I try to hold companies for a long time, not selling too early. It can cost you much more to sell a Multibagger to early then to hold a loser too long.

Who is the investor you admire the most?

Kris: Potential Multibaggers is highly influenced by three investors.

The first, and the biggest influence, is Phil Fisher. You may know him from Common Stocks and Uncommon Profits, a fantastic book that heavily influenced my views on investing.

The second is David Gardner, one of the co-founders of The Motley Fool and almost as important as Phil Fisher in the development of Potential Multibaggers. He has picked at least seven 100-baggers: Amazon, Nvidia, Tesla, Intuitive Surgical, Netflix, and others. And he does what I also emphasize: hold your stocks for the long term.

Every single one of those fantastic stocks had crushing drops along the way, 80%, 85%, 90%, Amazon almost 95% but David Gardner held the stocks all the way through. If you ever needed proof that holding longer beats selling too early, this is it.

The third influence is Peter Lynch. His level-headedness, his contrarian eye, and in general, he’s simply a very wise man. His influence is more about his mindset than his investing method.

How do you size positions, and does conviction level change the size over time?

Kris: I add when I see a company doing well, and I mean fundamentally, not the stock price. Take MercadoLibre ($MELI). The stock hasn’t done much recently, but the business keeps executing, so I’ve kept adding, even though it’s already my biggest position.

I always rank my portfolio by original allocation, not current value because I refuse to punish my winners and reward the losers. If I ranked by current value, every stock that did great looks like a position that’s too big and every loser like a position that’s too small. That’s not what you want. Based on original allocation, I usually don’t put more than 8% of my portfolio in one stock. Every now and then I stretch to 10%, and with MercadoLibre I’m even above that, which is very exceptional for me.

If a stock does so well that it becomes a 20% position at the current value of the portfolio, I’m fine with that. But that’s very personal. Can you sleep well at night with a 20% position? I can, but it doesn’t mean you can. That’s OK as well. Position sizing is very personal.

Do you have a formal checklist or set of criteria a stock must pass before it makes the portfolio?

Kris: There are 15 Potential Multibaggers criteria, but I wouldn’t call them a formal checklist in the classic sense. The Quality Score and the Selling Rules are more formal, but they come later, once I already have a position.

There are quite a few subjective criteria when I pick a stock. For example, the company must have a great mission statement. This may sound trivial, but companies with a clear purpose simply perform much better. I also look for optionality, smart backing, financial strength, and many more criteria.

I want to mention one in particular: Unscaled scalability. It’s based on Hemant Taneja’s book Unscaled.

In his book, Taneja argues that scale has become a disadvantage unless you allow consumers to finetune the products to their own needs. That’s unscaled. You could use personalized as a synonym.

Too much differentiation leads to higher costs and less profits. So, that unscaled product should still be spread at large scale. Think of Netflix ($NFLX), for example. Everyone has their own recommendations (unscaled) but Netflix can easily do this for all customers without much extra costs (scaled).

A lot of people talk about growth investing, but few actually stick with it through the drawdowns and still come out ahead. What do you think separates you from most individual growth investors?

Kris: People get scared, and I understand that. As I said, David Gardner held Amazon when it was down 95%. Most people are not able to do that. I’ve had multiple stocks that crashed hard, but I held them as well. Shopify was down 85% in 2022, Cloudflare 83%. Of course, I have my doubts as well during those periods. But I have my Quality Score and my Selling Rules to help me. As long as those are intact, I often add to my position. When it hurts the most, it’s often the best time to buy. Of course, initially, it feels like you are throwing good money after bad, but over the longer term, these buys are the best. Every month, I have a Best Buys Now article and the June 2022 Best Buys Now are up 367% on average, for example. You can download the most recent list here.

Beforehand, most people think they can hold through deep drops. But it’s not only the price drop that makes you sell, it’s the stories surrounding the stock. When a stock is down 50% or more, everything you hear and read about it is extremely negative, and those stories influence your thinking. My edge is that I can put my feelings aside because of the Quality Score and the Selling Rules. Of course, I also know the history of growth stocks, and volatility is just part of this game.

If you read 100 Baggers by Chris Mayer, a fantastic book, you know this. He studied 365 stocks that went up 100x or more. Not one of them avoided a 50% drop. The overwhelming majority was down 75% or more, and not once, but multiple times. That is the price of a 100-bagger, and most people cannot pay it. No pain, no gain, they say, but it’s hard to just suffer without any guidance. That’s what I do for my subscribers.

Conclusion

That’s it for today.

Kris just announced his new top 5 stocks.

Curious? Download them for free:

Download the top 5

Everything In Life Compounds
Pieter

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Hi friend 👋

Today we are buying a new stock for Our Portfolio.

This company:

🏛️ Outperformed Berkshire Hathaway by a wide margin since 1985
🧠 Is led by ‘The Canadian Warren Buffett’
🇮🇳 You get immediate exposure to the growing Indian market
🔄 Just like Berkshire Hathaway they use their float to invest in stocks
💰 Management thinks they can grow by 15% per year (doubling every 5 years)

Read more

Hi Partner 👋

Welcome to the third edition of our 10 Stocks for the next 20 Years series.

You already received two parts:

• Pieter’s selection

• TJ’s selection

Today it’s time for Arka’s selection.

Let’s dive in right away!

Built to last

At first glance, this challenge sounds very simple.

Just find 10 great companies and hold them for the next 20 years.

But history tells something different.

Do you remember the 20 biggest companies 20 years ago?

Here they are:

A lot of these are probably very familiar names.

But how many do you think are still in the top 20 today?

Here’s the list as of today:

The number of companies that made both lists?

Only 6 (!):

• Microsoft

• Walmart

• Intel

• Exxon Mobil

• Johnson & Johnson

• Cisco Systems

Companies like Coca-Cola and Home Depot are still exceptional businesses today.

However, they no longer make the list.

Something sets these six companies apart.

They have shown the resilience to weather the challenges of the past two decades.

So what do these companies have in common?

It’s not a single factor, it’s a combination of:

• A strong moat

• Strong management

• Healthy balance sheet

• Excellent capital allocation

• Continuous adoption to changing environments

It goes back to the basic foundation of our stock selection.

You should remember that finding a stock for the next 20 years is not about buying a good company.

It is about finding a business that can keep adapting and winning for decades.

Our job is to find those few great businesses, buy them and forget about it for the next 10 years.

Now let’s jump into my top picks.

10. Ferrari ($RACE)

How does Ferrari make money?

Ferrari builds fancy sports cars and sells fewer than people want to buy. It also makes money from racing, clothing, and spare parts.

Why will it still be relevant in 20 years?

• Ferrari is not a car company. It’s a luxury company.

• Rich people keep getting richer. They want things nobody else can have.

• Ferrari makes fewer cars than current demand (supply < demand)

9. Old Dominion Freight Line ($ODFL)

How does ODFL make money?

Old Dominion is a top American trucking company that specializes in less-than-truckload (LTL) shipping.

This means they combine freight from different customers onto a single truck.

They run over 260 service centers across North America.

Why will it still be relevant in 20 years?

• Moving physical items will always be necessary

• It is nearly impossible for new competitors to copy their billion dollar network

• They are the best at what they do

8. Thermo Fisher Scientific ($TMO)

How does Thermo Fisher make money?

Thermo Fisher Scientific is the world leader in serving science and healthcare.

The American company provides analytical instruments, laboratory equipment, clinical diagnostics, and drug manufacturing services.

They sell necessary equipment to the entire global biotechnology and research industry.

Why will it still be relevant in 20 years?

• Scientific research and the fight against diseases never stop

• They sell the picks and shovels for all biotech breakthroughs

• Massive regulatory switching costs protect their business

7. Applied Materials ($AMAT)

How does Applied Materials make money?

Applied Materials is the global leader in semiconductor equipment and engineering software.

They provide the highly specialized manufacturing systems, machines, and materials used to produce nearly every new computer chip and advanced display in the world.

This American company operates at the absolute ground floor of global technology.

Why will it still be relevant in 20 years?

• Microchips are the foundation of the future

• They supply the machinery to all chipmakers

• Atomic-scale engineering cannot be easily copied

6. Schneider Electric ($SU)

How does Schneider Electric make money?

Schneider Electric is a French multinational company that is a global leader in energy management and industrial automation.

They provide the electrical infrastructure, hardware, software, and services required to run homes, factories, and cities efficiently.

They have a massive network operating in over 100 countries

Why will it still be relevant in 20 years?

• The massive shift toward electrification is permanent

• AI and data centers have a bottomless thirst for electricity

• Buildings and factories must become highly energy-efficient

5. Xylem ($XYL)

How does Xylem make money?

Xylem is a leading global water technology provider.

They designs and manufacture specialized equipment for transporting, treating, testing, and efficiently managing water across municipal, industrial, and residential markets.

This American company has a network spread across the globe.

Why will it still be relevant in 20 years?

• Clean water is a permanent global necessity

• Aging infrastructure requires massive ongoing upgrades

• The rise of smart water networks protects their position

4. ASML ($ASML)

How does ASML make money?

ASML is a Dutch company that makes some of the world’s most important machines for the semiconductor industry.

They are the only company in the world that can build Extreme Ultraviolet (EUV) lithography machines.

This technology is critical to produce the most advanced chips found in smartphones, AI systems, and high-performance computers.

Why will it still be relevant in 20 years?

• They hold an absolute global monopoly on advanced chipmaking

• The complexity of their machinery is nearly impossible to copy

• They sit at the center of the permanent global tech expansion

Now let’s dive in the top 3.

Read more

Hi Partner 👋

I hope you are doing well.

Today it’s time to talk about growth investing.

In today’s interview you’ll learn how Kris was able to generate a +8,720% (!) return on Nvidia and a +2,668% return on Shopify.

Do you want to know what the best growth stocks are now?

Discover Kris’ favorite growth stocks right now here:

Download the list

Who is Kris Heyndrikx?

Kris Heyndrikx is one of my best friends.

We talk about business, life and investing every single day.

Kris is best known for his Twitter Account From Growth To Value (120.000 followers) and his investment newsletter Potential Multibaggers.

His newsletter is focused on growth investing.

Kris bought:

• Shopify ($SHOP) for $5.6 (current stock price: $155)

• Cloudflare ($NET) for $39 (current stock price: $310)

• Crowdstrike ($CWRD) for $24.53 (current stock price: $225)

• On top of that he also identified Nvidia ($NVDA) early.

Let’s now dive into this two-part interview!

How would you define your investment strategy?

Kris: I look for high-quality disruptive businesses that have the potential to go 10x or more over the next 10 years. Of course, these are not so easy to find. But when I find them, I do the hardest thing in investing: I hold them as long as they execute.

By the way, I’m pretty happy with a 5x return too. A 5x means you generate an average return of 17% per year for 10 years. A 10x means you generate a return of 26% per year for 10 years. This math shows you don’t have to gamble or trade to get fantastic results. You need to find a truly great company early and then give it the time to keep growing. Sometimes, you are surprised to the upside. I wouldn’t have expected Shopify to go more than 20x in the 9 years since I bought it.

Your Twitter handle is ‘From Growth To Value’. Could you elaborate on this?

Kris: My Twitter/X name is basically my entire philosophy in four words. I try to buy growth stocks and hold them so long that they become value stocks. When I started writing about stocks, in February 2016, Amazon ($AMZN) and Netflix ($NFLX) were still seen as high-growth stocks and way too expensive. Today, they are considered growth at a reasonable price. The next step is a value stock, like Google ($GOOG) was when everyone thought AI would kill it. Because I follow AI closely, I bought a position in Google at that point in time.

That journey, from growth to value, is where you can find life-changing returns. If you can hold a great stock for 30 years, the returns can become almost absurd. I know someone who invested about $1,500 in Netflix when he got out of college. He was thrilled when he could sell at a 40% profit the next year. That’s what most investors are happy with. But had he simply held his Netflix shares, that small position would be worth around $1.5 million today, and that’s with Netflix down almost 50% from its top right now. That’s the difference between OK returns and life-changing returns. That’s why I want to buy growth stocks and hold them as long as the fundamentals stay intact.

What do most investors simply get wrong about growth investing?

Kris: They think it’s all about adrenaline, jumping in and out of positions, chasing meme stocks, catching the next hype, ... But that’s not growth investing, that’s trading, and it’s a completely different game with much worse outcomes.

Finding a great growth stock is just 10% of the work, and it’s the easiest part. Holding it is where the real money is made, and holding is much, much harder than it sounds. When your stock is down 50% or 70% and all the headlines are negative, doing nothing takes more strength than acting.

Most people want to get rich fast. But time is your best friend in investing, and that is even more important for growth investing. Most people don’t have the patience, and that’s why they sell a future 100-bagger for a 40% profit. Charlie Munger said the most important rule of compounding is to never interrupt it unnecessarily. For growth stocks, with their higher returns, interrupting the compounding can even be more expensive than for quality stocks.

Take us through how an idea becomes a position. From discovering the company to pulling the trigger. Feel free to use a concrete example.

Kris: The process from idea to position is pretty slow for me, unlike what you may expect if you think growth investing resembles trading. My ideas come from everywhere: a post on X, one of my subscribers, a conference, a podcast, reading, ...

The first filter is extremely simple: what does the company do? I have to be really interested in what the company does. Why? Because boredom is an enemy in growth investing. I’m very curious about our future, and if I don’t get excited about what a company does, it’s often a sign that its future may not be that great. For a growth stock, that’s a huge red flag. On top of that, I follow up the companies in my portfolio very closely and write deep dives on all my Potential Multibagger stocks very quarter. If I’m not interested enough in what the company does, it’s impossible to do that. When I am interested, following up makes me feel like a kid in a candy shop, when I’m not interested enough, it feels like having to clean your toilet with a toothbrush.

That’s why there are industries I stay away from. Energy, for example, unless something is truly disruptive. Financials too, normally. But one of my picks is a disruptive bank: Nubank ($NU), already more than a three-bagger in three years. So, as you can see, this is not an absolute criterion.

I also have to see real growth potential in the market the company is operating in. If the overall pie is shrinking, even a great company is swimming against the current, and finding winners becomes much harder.

When a company has passed the first filter, 90% is already gone and they never make it to the second step, in which I look at revenue growth. I want at least 20%+ consistent revenue growth.

When that is the case, I apply the third filter: Management quality.

Only when a stock survives those three filters, the real research start. I read everything I can find: Conference calls, analyst days, the 10-Ks, the S-1s, interviews with the CEO, podcasts about the company and so on. And only if all of that is positive, I make it a pick and start writing my articles (I usually write 5 articles for a new pick). Then, my subscribers can buy to start a position and a day later or so, I also start a position.

You bought Shopify and Nvidia early. Looking back, what did you see that most of the market missed?

Kris: The story is maybe not that glorious as you may think. I picked Shopify ($SHOP) in February 2017 for my personal portfolio, at a split-adjusted price of $5.58. I had just listened to Tobi Lütke, the founder and CEO on a podcast, and I thought he was brilliant. So, in an impulse, I bought some Shopify shares.

After the initial good feeling, the regret came. I hadn’t followed my process, had not used my ratio but bought based on what I considered superficial emotions, like an amateur. I had not checked the valuation and I really thought I had acted stupidly. But I started analyzing why I bought the shares anyway. The more I thought about it, the more I saw that while the process was bad, the stock could be great.

That research period was the start of Potential Multibaggers. If I was this intrigued enough by this man from just a podcast to buy shares of his company, wouldn’t other people be attracted to him in real life? Probably his customers, his employees, his financial backers also thought he was fantastic and wasn’t that a very strong asset to have that you can’t see on any balance sheet?

That’s when I got an idea that changed my investing forever. There is very valuable knowledge in finance that almost nobody uses, because it is not seen as “real” knowledge: emotional intelligence. We all see things we can’t fully rationalize: you meet someone and you know this guy is brilliant, and if I ask you how you know, you can come up with rationalizations of your feeling, but the real answer will still be that you just knew.

Can you elaborate a little bit on this ‘emotional intelligence’?

Kris: Only about 10% of our knowledge is conscious, while the rest is subconscious. That unconscious knowledge is the collection of every lesson we’ve learned from the day we were born until now. And that knowledge is surprisingly accurate when it comes to certain subjects, better than the praised ratio. While there are some individual differences, most people are good at judging other people. And that’s great, because companies are made by people. You can have two identical companies and one will fail and one will become the best in the world. The difference is in the people that make the company.

Rational knowledge is often treated as the only reliable source of knowledge in investing. I think that’s a mistake. For months, I went into research mode and I looked back at the greatest investments ever. They were all connected to people. Apple with Steve Jobs. Amazon with Jeff Bezos, Tesla with Elon Musk, Walmart with Sam Walton, Berkshire Hathaway with Warren Buffett and Charlie Munger, and so on. The pattern was clear: a visionary founder CEO bringing an outsider’s view to an industry that hadn’t changed in ages often succeeds. So I made that one of my criteria.

After Shopify, which other stocks did you buy?

Kris: Three months after that impulse buy, on May 2, 2017, I started Potential Multibaggers, with Shopify as the very first pick and now with a much better process and patterns to look for.

I bought Nvidia in 2017 as well. I bought it for my own portfolio at a split-adjusted $2.50 or so, but I never made it an official pick. I thought it was already too big at around $60 billion, while Shopify only had a market cap of $4.5 billion at the time.

It’s pretty crazy that Nvidia became so big. The reasons why I bought Nvidia shares were, in that order, its founder and CEO Jensen Huang and the fact that they started talking about AI. In 2016 already, the company opened its press releases with “NVIDIA is the AI computing company.” That really convinced me already back then. Usually, there are signs like that, but you have to follow a company closely to see them.

I think what I saw that the market didn’t see was that these men had a vision for the future of their sector and the ability to execute that vision.

What’s a call you made that, in hindsight, you’re most proud of, not just because it worked, but because of how contrarian or hard it was to make at the time?

Kris: Shopify again, and this time because of what happened right after I picked it. A few weeks after I made it the first Potential Multibaggers pick, Citron Research came out with a short report about Shopify. Citron doesn’t have a great reputation anymore, but at the time it did, and I was pretty scared when I read the full report.

You know how it goes with short reports: if you are still relatively new to investing, you’re blown away by all the negativity and the strong words. So after reading it, I was even more worried. But then I started checking if what was written was actually true. And I thought it wasn’t. There was a lot of insinuation, but no substance. So I decided to buy more. Then Citron came with a second short report, and I think a third as well, and I bought more each time. I wasn’t that experienced with short reports yet, so I’m pretty proud of that one.

You’re a big fan of dollar-cost averaging. Could you elaborate on why you buy stocks every two weeks, plus ‘DCA on steroids’?

Kris: Dollar-cost averaging means investing the same amount every two weeks, every month, every quarter, whatever you choose. I do it every two weeks.

I allocate my money to the companies that perform well, but you cannot always judge that at a certain moment. You need time to see if an ambitious management plan works out, to see if revenue growth stays high, if margins develop in the right direction, if there’s enough innovation and so on and so on. That’s why I love DCA. For some companies, Shopify, Cloudflare, CrowdStrike, I have probably bought more than 50 times over all those years.

I also developed dollar-cost averaging on steroids: if the market drops, I invest more. And to be clear, I’m talking about the S&P 500 here, not my own portfolio. If the S&P 500 is down 10%, I try to invest 20% more, if it drops 20%, I invest 50% more and if it’s down 30%, I try to double the money I invest. That’s possible because I’m still in my earning phase. If you have a closed portfolio, without money coming in, this works differently.

I also use dollar-cost averaging for big lump sums. If you get an inheritance or a big bonus, I would divide it and invest it in 52 times, so over 2 years, every two weeks, unless the market drops substantially, of course, as the DCA on steroids then kicks in.

Yes, if you look at the research, lump-sum investing has the highest return on average. But it’s not the average that counts, it’s your portfolio that matters to you. If you dollar-cost average, your returns will be almost as high as lump-sum investing, but they will be much higher than trying to time the market. Waiting for 52-week lows to invest usually gives you lower returns than just investing every two weeks. Why? Because the market goes up on average.

Conclusion

That’s it for today.

As this interview is quite extensive, you’ll receive Part II next Tuesday.

Did you like this?

Discover Kris’ favorite stocks here:

Download the list

Everything In Life Compounds
Pieter

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Hi Partner 👋

Last Thursday, we talked about The Lindy Effect.

You can find the article here.

Today, we’ll dive into ‘10 Stocks for life’.

The oldest stock in this list has been around for over 200 (!) years.

Before we begin, here’s a quick reminder of The Lindy Effect:

• The longer something has survived, the longer it’s likely to survive.

• Companies that have adapted for decades have already proven their durability.

• Nothing is guaranteed, but longevity is often a sign of a great business.

Let’s look at the ten oldest companies on our list.

10. Coca-Cola ($KO)

• Founded: 1886

• IPO: 1919

• History: Pharmacist John Pemberton created the syrup in Atlanta. It originally contained small amounts of cocaine (!) and was marketed as a pain reliever.

The Lindy Effect

• People will always want sweet drinks.

• Coca-Cola is one of the world’s strongest brands.

• Its global distribution network is nearly impossible to copy.

How Has Coca-Cola Performed?

Coca-Cola has compounded at more than 10% per year since 1990.

They returned nearly 4,000% to shareholders over this period.

9. Eli Lilly ($LLY)

• Founded: 1876

• IPO: 1952

• History: Civil War veteran and pharmacist Col. Eli Lilly opened a pharmaceutical lab in Indianapolis.

The Lindy Effect

• People will always get sick, and they’ll always want medication to help them.

• Lilly has decades of experience developing new medicines.

• Strong patents protect its best products.

How Has Eli Lilly Performed?

Lilly has returned more than 17,000% since 1990.

8. Brown-Forman ($BF.B)

• Founded: 1870

• IPO: 1929

• History: George Garvin Brown began selling bottled whiskey (Old Forester) in Louisville.

The Lindy Effect

• People have been drinking alcohol for centuries.

• Brands like Jack Daniel’s have loyal customers around the world.

• Strong brands give the company pricing power.

How Has Brown-Forman Performed?

Since 1990, Brown-Forman has returned around 1,800%, compounding at 8.5% annually.

7. Sherwin-Williams ($SHW)

• Founded: 1866

• IPO: 1964

• History: Henry Sherwin and Edward Williams founded a paint company in Cleveland.

The Lindy Effect

• Homes and buildings will always need paint.

• Sherwin-Williams has one of the biggest paint distribution networks in the U.S.

• Its large store network makes contractors choose Sherwin-Williams because there’s always a store nearby for supplies.

How Has Sherwin-Williams Performed?

The stock returned 15.5% (!) per year since 1990:

6. Union Pacific ($UNP)

• Founded: 1862

• IPO: 1897

• History: Chartered under the Pacific Railway Act to build the eastern half of the first transcontinental railroad.

The Lindy Effect

• The economy depends on moving heavy goods.

• Rail is one of the cheapest ways to transport freight.

• Union Pacific’s rail network would be almost impossible to build today.

How Has Union Pacific Performed?

Union Pacific has returned more than 9.000% since 1990.

5. American Express ($AXP)

• Founded: 1850

• IPO: 1977

• History: Started as an express-delivery (freight) company in Buffalo, NY, before moving into financial services.

The Lindy Effect

• People will always need a way to pay for things.

• More cardholders attract more merchants, and vice versa.

• American Express already has a strong network, and it becomes even stronger as it grows.

How Has American Express Performed?

American Express has returned more than 7,000% to shareholders since 1990.

4. Pfizer ($PFE)

• Founded: 1849

• IPO: 1942

• History: Cousins Charles Pfizer and Charles Erhart opened a fine-chemicals business in Brooklyn.

The Lindy Effect

• Medicines will always be needed.

• Decades of research give Pfizer a competitive advantage.

• Its large portfolio keeps cash flowing even as patents expire.

How Has Pfizer Performed?

Pfizer has returned 9.8% per year on average since 1990.

Now let’s dive into the top 3 and the conclusion.

Read more

Do you know about the Lindy effect?

The longer something has been around, the longer you can expect it to stay around.

Let’s see why this is so powerful and how we can use it to become better investors.

The Lindy Effect

Do you know Lindy’s Delicatessen in New York City?

It was a restaurant on Broadway that performers would often eat at.

The story goes that comedians used to joke that if a Broadway show had been running for two weeks, it would probably last another two weeks.

If it had been running for two years, it would probably last another two years.

Well… It turned out that they were right.

How the Lindy Effect works

If you're 80 years old, the Lindy Effect doesn't mean you'll live to 160.

The Lindy effect only applies to things that are lasting long:

• Ideas

• Technologies

• Art

• …

These things don’t age like human beings.

Every day something survives, it proves it is useful and resilient.

That makes it more likely to survive another day.

Think about these examples:

• Books: Marcus Aurelius’s Meditations is much more likely to still be read in 100 years than the latest business strategy book to hit the New York Times bestseller list last week

• Technology: The bicycle has stayed almost unchanged since the 1800s. Meanwhile, trends like Segways, hoverboards, and electric scooters have come and gone.

• Food: Every few years, a new diet or supplement becomes popular. But people have eaten olive oil, bread, and fish for thousands of years. They’ll probably still be eating them 100 years from now. The latest diet products may not be around anymore.

You can use this concept in your daily life too.

You’ll probably still wear a quality pair of classic leather shoes in 10 years .
But the newest trendiest pair? Unlikely.

But did you know that The Lindy Effect an also help you in investing?

The Lindy Effect In Investing

Capitalism is brutal.

• 50% of all businesses fail within 5 years

• 80% of all businesses are gone within 10 years

But a small number of exceptional businesses have survived for more than 100 years.

Some companies in Japan have even been around for over 1,000 years.

Lindy Businesses

These very old businesses could be considered Lindy businesses.

You probably know Deere & Company as John Deere.

It’s a Lindy business that has been around since 1837 (!).

It began when a blacksmith named John Deere made a polished steel plow from a broken sawblade.

The basics of farming haven’t changed in thousands of years.

That means Deere’s expertise, brand, and reputation have been growing for nearly 200 years.

Now, they are a global giant making GPS-guided, autonomous tractors.

And they still make plows.

If a business has survived 189 years of wars, recessions, and technological change…

The Lindy Effect suggests it is likely to survive another 189 years.

That’s important because the value of a business depends on all the cash it will generate in the future (discounted to today).

The Lindy effect states that the older a business is, the longer it will survive.

For investors, a longer life means more future cash flow.

The data proves this works.

Here is the performance of a portfolio of 100-year-old companies compared to the S&P 500 since 2000.

20 Lindy Companies

Buying Lindy companies is a great way to build wealth in a very boring way.

That’s why today and on Sunday, we will cover 20 Lindy stocks you should know.

Let’s dive in right away.

20. McDonald’s ($MCD)

• Founded: 1955

• IPO: 1965

• History: Ray Kroc founded the company in 1955, expanding on the original restaurant opened by the McDonald brothers in 1940.

The Lindy Effect

• Food is a fundamental human need that isn’t going anywhere.

• The restaurant business can be tough, but McDonald’s is essentially a real estate company that collects rent and royalties.

• McDonald’s global brand and scale make it hard to compete with.

How Has McDonald’s Performed?

McDonald’s has a total return of more than 6,000% since 1990.

19. Marriott International ($MAR)

• Founded: 1927

• IPO: 1993

• History: J. Willard Marriott opened an root beer stand in Washington, D.C., which gradually expanded into a global hotel empire.

The Lindy Effect

• Hotels have been around for thousands of years (travelers will always need a place to stay).

• Marriott earns fees without owning most of its hotels.

• Its brands and loyalty program keep customers coming back.

How Has Marriott Performed?

Marriott generated over +10,000% for shareholders since its IPO in 1993.

18. Walt Disney ($DIS)

• Founded: 1923

• IPO: 1957

• History: Walt and Roy Disney started an animation studio in Hollywood known as the Disney Brothers Cartoon Studio.

The Lindy Effect

• The human desire for great stories will never go away.

• Disney’s characters have been loved for generations.

• Its brand and cultural importance gives Disney pricing power across its businesses.

How Has Disney Performed?

Disney’s stock has been relatively flat over the past decade.

But since 1990, it’s up more than 1,300%.

17. Moody’s ($MCO)

• Founded: 1909

• IPO: Spun off as we know it today in 2000

• History: John Moody published his first bond-rating manual in 1900, and Moody’s Investors Service officially began rating securities in 1909.

The Lindy Effect

• The financial system depends on credit ratings.

• Only a few companies dominate this market.

• It would be very hard for a competitor to gain the trust Moody’s has.

How Has Moody’s Performed?

Moody’s is up more than 6,000% since its spin-off in 2000.

16. Bank of America ($BAC)

• Founded: 1904

• IPO: 1979

• History: A.P. Giannini founded the Bank of Italy in San Francisco to serve working-class immigrants; it was later renamed Bank of America in 1930.

The Lindy Effect:

• People will always need a safe place to keep their money.

• Bank of America’s scale gives them a huge low-cost deposit base.

• Changing banks is a pain, creating switching costs, and strict regulations protect BoA from competition.

How Has Bank of America Performed?

Bank of America has delivered a total return of more than 1,300% since 1990.

15. 3M ($MMM)

• Founded: 1902

• IPO: 1970

• History: Founded as Minnesota Mining and Manufacturing to mine corundum, it quickly pivoted to inventing and producing abrasives, adhesives, and consumer goods.

The Lindy Effect

• Many industries rely on 3M’s products every day.

• Its products are built into thousands of supply chains.

• Years of innovation and research make 3M difficult to replace.

How Has 3M Performed?

Since 1990, 3M has generated a total return of over 2,600%.

14. PepsiCo ($PEP)

• Founded: 1898

• IPO: 1978

• History: Pharmacist Caleb Bradham created Pepsi-Cola. The modern corporation was formed after a 1965 merger with Frito-Lay.

The Lindy Effect

• People will always buy drinks and snacks.

• Its brands are known and trusted around the world.

• Its distribution network is almost impossible to match.

How Has PepsiCo Performed?

PepsiCo has returned nearly 3,100% to shareholders since 1990.

Now let’s dive into the top 3.

Read more

It’s #QualityTuesday!

In this series, I’ll teach you 5 things about the stock market in less than 5 minutes.

1️⃣ How to find great stocks

Do you know the secret to great stocks?

They are very profitable and reinvest most of their profit in organic growth.

A Compounding Machine grows its value at rapid rates by reinvesting its profits at high returns.

Two metrics are important:

• ROIC: tells you how efficiently a company turns capital into profits

• Reinvestment rate: tells you how much of those profits can be reinvested back into growth

Just image a company with a ROIC of 25% reinvests 40% in itself:

Now compare that to a company earning 10% ROIC while reinvesting 65% of its earnings:

Despite reinvesting much more capital, it compounds at only 6.5%.

This is the key difference between average businesses and truly exceptional ones.

You want companies with a high ROIC (> 15%) that reinvest a lot in organic growth.

2️⃣ Book Tip: Principles (Ray Dalio)

Principles by Ray Dalio is an amazing book.

It will teach you three things:

• How to think independently

• Learn from mistakes

• Creating systems for better decisions

I created a full book summary. You can read it here:

Summary: Principles by Ray Dalio

3️⃣ One simple investment quote

You know how to get rich? But really rich?

It’s not about a Magic Formula or big secrets.

It’s all about being patient.

Charlie Munger said it best:

4️⃣ Interview Lawrence Cunningham

Do you know Lawrence Cunningham?

He’s a professor and wrote some amazing books about Warren Buffett.

On top of that, he serves in the board of directors of Markel and Constellation Software.

Curious to learn more? Read our interview here.

5️⃣ Stock Pitch: Diploma PLC ($DPLM)

Diploma acts as the middleman nobody talks about.

When a Boeing engineer needs a specific bolt for a 787, or a hospital needs a sterile valve for an MRI machine, they call a specialist distributor.

Diploma owns hundreds of these niche distributors.

Each one is tiny, local, and deeply embedded in its supply chain.

The best thing?

They buy family-run businesses at 6–8x earnings, leave the founders in charge, and give them full autonomy.

Over time, they cross-sell products, consolidate purchasing, and raise prices by 3-5% every year.

Customers barely notice because these products account for just 0.2% of their total costs.

The result? An incredible 18.9% annual return over the past 34 years.

That’s it for today.

In case you missed it:

• Why I put ALL my money into this strategy

• Deep Dive MercadoLibre

Everything in life compounds
Team Compounding Quality

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Investing is the easiest way to build wealth.

Our Portfolio is making almost $100.000 (!) in Free Cash Flow per year for us.

And this while we don’t have to work for it.

As Warren Buffett said:

Here’s what Our Portfolio makes for us:

• $96.156 per year

• $8,018 per month

• $1,841 per week

• $263.63 per day

• $10.98 per hour

• $0.18 per minute

Let’s dive into Our Portfolio Update today.

Berkshire Hathaway

Berkshire Hathaway is the best investment holding in the world.

Here’s their track record compared to the S&P 500:

If you do the same thing as everyone else you’ll get the same results as everyone else.

What this means?

Every active investment strategy faces periods of out- and underperformance.

Just look at how Berkshire performed in 1999:

• Berkshire Hathaway: -18.9%

• S&P 500: +23.0%

Something similar can be seen over the past year:

• Berkshire Hathaway: +3.5%

• S&P 500: +19.5%

The good news?

Periods of underperformance are always followed by periods of outperformance.

Especially for amazing investors like Warren Buffett.

Like it did from 2000 to 2003:

• Berkshire Hathaway: +53.7%

• S&P 500: -19.2%

I think we could see something similar in the years to come.

There is more and more evidence that the reversal is starting.

Over the past few months, the S&P 500 has been relatively flat:

But some of the sectors that have done very well are starting to suffer.

While the S&P 500 was flat, the iShares Semiconductor ETF declined by 20% in mid July:

The next chart shows the expected market volatility in two different ways:

• VIX (dark blue): Measures the expected volatility of the overall S&P 500 index.

• VIXEQ (light blue): Measures the average expected volatility of the individual companies in the S&P 500. In other words, it shows the expected price swings of the average stock in the index.

Right now, the gap between the two is much wider than usual.

Why?

• Individual stocks are making large moves based on company-specific news, such as earnings reports and AI developments.

• But many of these stocks are moving in opposite directions, so their gains and losses largely offset each other at the index level.

This could be a sign that the AI and semiconductor trade is cooling off.

In the meantime, investors rotate into other parts of the market.

Quality stocks have held up particularly well over the past month (orange line):

Our Portfolio

As you could already see in the chart with the Free Cash Flow, Our Companies are becoming stronger and stronger.

Year after year.

Another way to look at this?

Owners Earnings.

The evolution looks as follows:

The fundamentals of Our Portfolio also looks way healthier than the S&P 500:

Our Portfolio is also cheaper than ever.

Sometimes, it takes Mr. Market time to recognize a company's true value.

Just look at this table from François Rochon:

Between 2005 and 2011:

• Owner’s earnings: +10% per year

• Stock prices: +6% per year.

Between 2012 and 2014:

• Owner’s earnings: +16% per year

• Stock prices: +28% per year

But over the long run (2005–2014), Owner Earnings and stock prices both compounded at 12% per year.

The lesson?

In the short term, stock prices are driven by valuation changes.

In the long term, they follow owner earnings.

You can think about this like a rubber band.

The further away the stock price stretches from the underlying business fundamentals, the harder it usually snaps back.

My friend Brian Feroldi has a great graphic to reminds us that what matters in the long run is the business.

Let’s now dive into Our Portfolio and give an update.

Read more

You want to invest in companies that generate a lot of cash.

But you know what’s even better?

Companies that:u

1. Generate a lot of cash

2. Are growing attractively

3. Trade at cheap valuation levels

The good news is you can easily achieve this via some well-chosen ETFs.

Subscribe now

The Buffett Mindset

When you look at a ticker on a screen, it’s easy to forget what you’re actually buying.

Warren Buffett has called The Intelligent Investor by Ben Graham the best investing book ever written.

Here are the three most important takeaways:

The most important thing?

When you buy a stock, you become the owner of that company.

It’s like buying a part of your local butcher across the street.

And it also means: if you buy 1 share of a company, you should be willing to buy the entire business if you had the money.

So just imagine you buy 1 share of Apple today.

In that case, you would be willing to buy the entire company for $4.6 trillion and you think it’s worth more than that.

PS If you have $4.6 trillion available, please send me a DM.

I’m just kidding of course… Or not? 😉

What’s the Purpose of a Business?

If owning a stock makes you a business owner, it’s worth asking what the purpose of a business is.

I think the easiest way to answer this is to think about a small, local business.

You probably have a gas station or convenience store in your town.

Let's use this as an example.

The owner runs the business to make sure your car is fueled with gas, and that you’re fueled with coffee or snacks.

But the real purpose?

To sell you those things so that the owner earns an income.

Which, of course, means cash.

A business can look profitable on paper…

But if it has to reinvest every dollar into inventory or repairing gas pumps, it's not a great business.

Why would you want to own it?

As an investor, you want businesses that produce a lot of Free Cash Flow (FCF).

Free Cash Flow is the real cash a company generates after deducting all expenses.

It’s basically all cash that comes in minus all cash that goes out.

Two ways to win

The beauty of being an investor?

You have more than one way to win.

A business owner makes more money when the business becomes more profitable.

But as an investor, you can win in two ways:

• More profit: The business grows its earnings.

• Higher valuation: The market decides to pay more for those earnings (e.g., the P/E ratio goes up).

More profit

Nvidia's stock surged nearly 900% between 2023 and 2025.

That's despite its P/FCF multiple falling from over 100x to 58x.

The reason? Free cash flow grew by almost 25x (+2,500%).

Multiple Expansion

But a stock can also go up without profits growing.

Just take Apple from 2022 to 2025.

The stock went up more than 60% during that period:

But Free Cash Flow went down during the same period.

What happened?

The answer is multiple expansion.

The market decided that instead of being worth 20x cash flow, Apple was worth 40x.

In other words: the valuation of Apple doubled.

The Twin-Engines of Returns

But what if both engines fire together? That’s where magic happens.

In his book 100 Baggers, Chris Mayer calls this the ‘twin-engines’ of wealth creation.

• Engine 1: High earnings growth (like Nvidia).

• Engine 2: Multiple expansion (like Apple).

When you buy a cheap, growing company, you benefit from both rising cash flows and an expanding valuation multiple.

That’s what happened to Caterpillar ($CAT) from 2019 to today.

• Free Cash Flow: +86%

• Multiple: +186%

• Stock Price: +536%

High earnings growth + multiple expansion is the golden goose for you as an investor.

To summarize

• Stocks are pieces of businesses.

• Businesses exist to generate cash.

• Investors make money in two ways:

  • When the business generates more cash

  • When the market is willing to pay a higher multiple for that cash.

• Combining growth with an attractive valuation gives you two powerful engines for compounding.

Wouldn’t it be interesting to buy an ETF that captures exactly these characteristics?

The good news is that you can.

⭐ ETF of the Month

VictoryShares Free Cash Flow ETF (VFLO)

Key Information

• Name: VictoryShares Free Cash Flow ETF

• Ticker: VFLO

• Total Expense Ratio: 0.39%

• Physical/Synthetic ETF: Physical

What?

The ETF invests in large companies in the United States with a specific set of characteristics:

1. High Free Cash Flow Yield

2. Strong forward growth

You might be wondering how this works in practice.

The ETF starts with the VettaFi US Large Cap Free Cash Flow Index.

Afterwards, it applies a two-step filter:

1. Value: It finds companies generating the most free cash flow relative to their enterprise value

2. Growth: It screens out companies with the lowest expected growth

Why?

Buying the cheapest companies with the highest expected growth gives us the best chance to let our two favorite return engines work together:

• Attractive growth

• Room for multiple expansion

Historically, this strategy has worked very well.

Companies with the highest expected FCF/EV had a return of 17.3% (!) per year:

Sector Split

Here’s the sector breakdown of the ETF.

The three largest sectors are Information Technology (38.6%), Health Care (17.9%) and Consumer Discretionary (15.9%).

Top Holdings

Here are the top 10 holdings of VFLO:

ETF Portfolio Update: July 2026

Now let’s dive in Our ETF Portfolio Update.

Our Portfolio is a great mix of ETFs that should be able to outperform in the long term.

We use multiple factors that tend to do well:

👑 Quality: Only invest in companies that have already won
📏 Size: The smaller the better
🚀 Multifactor: Quality, size, value & momentum
🌏 Emerging Markets: Small exposure to Emerging Markets

Let’s now dive into the ETF Portfolio itself.

You have 24/7 access to the ETF Portfolio here:

Read more

Chuck Akre loves Compounding Machines.

He returned 12.6% per year to shareholders since 2009.

Let’s dive into the lessons and philosophy of this legendary investor.

Subscribe now

Who is Chuck Akre?

Chuck Akre is a highly respected investor.

He is known for his disciplined approach and long-term mindset.

Akre is seen as one of the best quality investors in the world.

Chuck A…

Read more

Hi Partner 👋

Today we will buy a very boring company.

This company:

• Was the clear market leader 20 years ago

• Is still the market leader today

• Will (probably) still be the market leader in 20 years from now

The average yearly return since 1990? +14.4% per year.

An investment of $10.000 turned into $1.4 million.

Those are exactly the companies we’re looking for.

Read more

One of the world’s most valuable pharmaceutical companies? Eli Lilly.

They dominate the entire market for diabetic and obesity care together with Novo Nordisk.

Here’s what a $10,000 would be worth since 1992:

• S&P 500: $0.3 million

• Eli Lilly: $1.8 million

Eli Lilly – General Information

👔 Company name: Eli Lilly and Company
✍️ ISIN: US5324571083
🔎 Ticker: LLY
…

Read more

Has Terry Smith lost his mind?!

Typically, he doesn’t trade much.

But in the first six months of 2026, he turned over more than 50% of his portfolio.

He even announced a major shift in his investment strategy.

Let’s see what’s happening.

Who is Terry Smith?

Terry Smith is often called “The English Warren Buffett”.

He’s considered as one of the best quality investors in the world.

Terry typically is very straightforward and an independent investor.

His background looks like this:

• Grew up in East London, was at the top his class in history at Cardiff, and entered banking at Barclays in the 1970s.

• In 1992, he wrote Accounting for Growth, a book that exposed corporate accounting tricks and was so controversial that it got him fired.

• Launched Fundsmith in 2010. Today, it manages £12 billion and has achieved an impressive 13.1% CAGR after fees since inception.

Pieter even had the opportunity to have dinner with Team Fundsmith in Omaha at Gorat’s last year (Warren Buffett’s favorite steakhouse).

Investment Style

Terry Smith’s philosophy is simple.

It comes down to three steps:

1. Buy Good Companies

Terry Smith looks to buy high-quality businesses that dominate their markets.

• High ROCE: Look for a Return on Capital Employed of more than 15–20%

• Wide Moats: Focus on companies with pricing power and high gross margins

• Cash is King: Prioritize strong organic growth and businesses that convert a lot of their net earnings into free cash flow.

2. Don’t Overpay

While quality comes first, valuation still matters.

He is willing to pay a fair premium for an exceptional business but tries to avoid overpaying.

3. Do Nothing

Minimizing trading keeps fees low and lets compounding do the work over time.

Patience has been one of Terry’s main advantages.

The Fundamentals

Fundsmith does hold a portfolio of companies with great fundamentals:

Performance

Over the long term it has allowed the fund to outperform.

Fundsmith generated a CAGR of 13.1% after fees since 2010.

But guess what?

Terry Smith has underperformed every single year over the past 5 years:

Which brings us to the letter Terry Smith recently wrote to his investors.

You can read it here:

Shareholder letter Terry Smith

Shareholder Letter Terry Smith

There are two things I want to focus on today:

1. Why he thinks he has underperformed

2. How he is shifting his strategy

Why he has underperformed

The letter says the fund underperformed because investors cared more about momentum than business fundamentals.

I think that’s true, and we’ll explain Terry’s argument in a moment.

How he is shifting his strategy

Because of that, Smith says that the fund will be changing strategy and taking momentum into account.

That means the fund will be buying and selling more than it has in the past.

In other words, Buy Good Companies and Don’t Overpay are still the core principles.

But there will be a little less Doing Nothing going forward.

The interesting part is why Terry is making this change.

It’s not because he thinks it’s the best investment decision.

It’s because if he didn’t adapt, the fund would eventually go out of business.

Passive Investing and Momentum

Terry has been talking about the markets becoming increasingly more momentum driven for quite some time.

And there’s no argument that he’s wrong,.

Just look at how momentum has been outperforming everything else lately:

He starts his letter with a simple point.

More people are investing in ETFs.
At the same time, excitement around AI is growing.

As a result, the market cares less about the underlying businesses.

What’s the point of passive investing?

Passive investing was popularized by John Bogle, who founded Vanguard.

Bogle’s argument was pretty simple:

• Most active funds fail to beat the market. On top of that, they charge fees that reduce your returns.

• Index funds remove those high fees and simply match the market’s average return.

As a result, investors often end up with more money.

Makes sense.

But if that argument holds true, then shouldn’t the index and the average manager perform similarly?

They used to, but that’s started to change:

Some people argue that this is evidence that the average fund manager is terrible.

According to them, it’s why everyone should just switch to passive.

Passive investing is now driving the market

That could be true.

But Terry offers another explanation.

A momentum driven feedback loop:

There’s pretty good evidence this is correct.

Here’s the performance of the S&P 500 vs Hedge Funds from 2007 to 2016.

I’d say that’s a pretty good representation of passive vs active performance.

They run close together until somewhere in 2012 or 2013.

Afterwards the S&P 500 starts to outperform.

You can see the flows of capital of active versus passive here:

Money flowing into active funds peaked around 2012 or 2013.

Since then, those flows have declined.

Meanwhile, money has kept pouring into passive funds.

This creates two powerful feedback loops:

• Passive funds: More money comes in → they buy more stocks → prices rise → performance improves → even more money comes in.

• Active funds: Money flows out → they sell stocks → prices fall → performance gets worse → even more money flows out.

As a result, the stocks passive funds own become more expensive, while the stocks active funds own become cheaper.

That makes passive funds look even better and active funds look even worse, simply because of where the money is flowing.

Today, passive funds manage more than 60% of all assets under management.

This has never happened before.

Trades set prices

The stock market is like a big auction.

Stock prices change every time someone buys or sells.

Every Trade Needs Two Sides

You can only buy a stock if someone else is willing to sell it.

And you can only sell a stock if someone else is willing to buy it.

It sounds obvious, but it’s an important concept.

How the auction works

To make trades happen, the stock market uses an ongoing list of offers called the Bid and the Ask.

• The Bid: is the highest price a buyer is currently willing to pay for the stock

• The Ask: is the lowest price a seller is currently willing to accept

The difference between these two numbers is called the spread.

It’s all tracked in the order book, which looks like this:

In the image, there are a lot of people willing to buy at $37.37.

But the lowest price anyone is willing to sell is $37.38.

As a result, no transaction will take place.

How the Price Actually Moves

For a stock price to move, either the buyer or the seller has to give in.

• If buyers are eager: They stop waiting and agree to pay the seller’s asking price. The trade happens, and the stock price moves up. If more buyers keep doing this, the price keeps rising.

• If sellers are eager: They accept the buyer’s lower price. The trade happens, and the stock price moves down. If more sellers keep doing this, the price keeps falling.

Who’s making the trades?

If trades set prices, then we need to understand who’s making the trades.

Terry Smith tells us:

When Jack Bogle introduced index funds, the idea was simple.

Index funds would stay small and benefit from the research done by professional stock pickers.

At the time, active investors made up almost the entire market.

But that’s no longer true.

Today, a large part of the market is driven by index funds, ETFs, quant funds, and momentum traders.

Only a small share of trading comes from investors who actually read annual reports and research individual companies.

Index funds and ETFs follow a very simple strategy:

• Money comes in → Buy

• Money goes out → Sell

Index funds and ETFs don’t care about price.

They simply buy or sell based on money flowing in or out.

Think back to the auction example.

If a lot of money flows into a fund and there aren’t many sellers, the price has to rise until someone is willing to sell.

The opposite is also true.

If a lot of money flows out and there aren’t enough buyers, the price has to fall until someone is willing to buy.

What happens next?

When index funds buy and sell without looking at price, they change how the stock market works.

But what happens if that buying and selling hits a market with fewer buyers and sellers than people expect?

In Part 2, we’ll show how this is already creating bigger swings in stock prices.

We’ll also explain why it could become a serious problem for the U.S. retirement system.

Stay tuned.

Conclusion

That’s it for today.

I think the move Fundsmith made is strange.

They are switching from quality to momentum right now.

They might be making the switch at exactly the wrong time.

Did you like this?

This was an article TJ wrote for Compounding Dividends.

You can discover more here:

Discover more

Everything In Life Compounds
Pieter

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

By monthly tradition, you’ll get an update on our Best Buys of the month.

What’s going on in the markets? And what are our favorite stocks?

Let’s get a little bit wiser today.

Subscribe now

June 2026

Last month, the S&P 500 fell by 1.5%:

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Hi Partner 👋

Recently, many people asked me about MercadoLibre ($MELI).

This company:

🌎 Is often called the Amazon of Latin America
🚀 A remarkable growth story: revenue grew 30%+ for 28 straight quarters
💰 Trading at its cheapest valuation in 10 years

That’s why I teamed up with my friend Kris.

He’s an expert in growth investing.

I don’t know anyone who understands growth companies better than he does.

By the way, MercadoLibre is his largest position!

In this 40-minute webinar, you’ll learn everything you need to know:

Download the Deep Dive

Everything In Life Compounds
Pieter
PS You want to learn about MercadoLibre? Download the Deep Dive here (you can also watch it later).

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Hi Partner 👋

Someone recently called us ‘stupid’ for investing in quality stocks.

They said we’re missing a bull market that’s creating intergenerational wealth.

Let me be crystal clear…

I feel 100% comfortable with our portfolio and current positioning.

Let’s tell you exactly why.

What's happening right now

Mr. Market has entered into an exaggeration phase.

…

Read more

Hi Partner 👋

I hope you are having an amazing summer.

Let’s dive into Our Portfolio Update today.

What’s going on in the markets today? And how are our stocks doing?

Subscribe now

Chasing Momentum

Investors seem to continue to be focused on the short term and chasing momentum.

Remember when the Magnificent 7 were the most exciting stocks in the market?

Investors have already moved on.

Bill Ackman says the market is distracted by momentum and hype.

He sees companies like Microsoft and Meta as old-fashioned.

The market is distracted by big IPOs.

Here are just a few examples: