Mindset SQUARED™ is Compounding Academy's framework for identifying, analysing, valuing and deciding when to buy high quality companies.
It is designed for long term investors who want a structured, repeatable process for building a portfolio of durable businesses rather than relying on tips, news headlines or market noise.
Screen or shortlist high quality companies
Assess the potential and durability of companies
Estimate intrinsic value and decide when to buy
We know, however, that the vagaries of financial markets and their inherent volatilities can create strong emotions of fear and greed in any investor. These emotions, if unchecked, can challenge even the most seasoned investor's ability to stay focused on long term goals.
To address this, we've developed a highly structured framework designed to reinforce the importance of maintaining a long term perspective. The framework acts as a mental anchor, helping you navigate the inevitable ups and downs of the market.
Call to action here!Incremental, steady gains grow exponentially over time. Embracing this principle is essential to investing in companies that exhibit compounding characteristics and avoiding those that do not.
Compounding works best when given time. Staying disciplined and patient allows you to weather market fluctuations without losing focus on long term goals.
Developing critical thinking skills helps investors ignore market noise, avoid herd mentality and make decisions based on fundamentals rather than emotion.
Successful investing relies on focusing on the core drivers of a business, such as profitability, growth and resilience, rather than being distracted by short term trends.
The SQUARED process is a structured, objective and repeatable way of evaluating every potential company. The process is specifically designed for analysing established companies and each letter represents a step in this journey.
By following the seven steps, we focus on identifying businesses with the quality and characteristics necessary to join our group of high calibre, compounding companies. The goal is to objectively determine whether a company has the potential to consistently generate returns over the long term.
The screening stage aims to reduce a very large universe of listed companies to a much smaller group of candidates with the characteristics we typically associate with quality compounders.
At this stage, we are not trying to know everything about the business. We are trying to narrow the field of businesses with the strongest fundamentals that are worth further investigation and analysis.
The goal here is not to find a perfect company on day one. The goal is to improve the odds by spending time only on businesses where the underlying economics already look attractive.
How to screen for high quality companiesWhile the initial screening identifies companies with strong financial metrics, the quality check evaluates their durability and competitive advantages, ensuring they are built for long term success.
The quality check ensures that only businesses with durable competitive advantages move forward. This stage saves time and effort by eliminating companies that might initially look strong but don't meet the high standards required for deeper analysis.
22 questions for assessing business qualityOnce a company passes the Screen and Quality Check stages, it's time to ensure we fully understand its business. That means going beyond the headline numbers to develop a clear view of its business model, revenue drivers, customers, sources of competitive advantage and the industry it operates in.
A deep understanding of the fundamental drivers of the company is crucial, from its unit economics to the relationships with suppliers, customers and broader market dynamics.
By answering these questions, investors can assess whether the company has the building blocks for long term compounding.
How to analyse a company's business model and moatThe analyse stage takes the qualitative understanding of the business and translates it into a rigorous financial view. We build models, examine trends in margins, returns and cash flow, and stress test the sustainability of growth.
The aim is to arrive at a defensible base case for how the business could develop over the next five to ten years, and identify the drivers that would push results above or below that base case.
How we analyse a compounding businessOnce we have built our thesis, we deliberately try to break it. The rip apart stage is where we play devil's advocate: what could go wrong, what are the bear cases, and what assumptions is our thesis quietly relying on.
This step is designed to fight confirmation bias and surface the risks that matter before capital is put at work.
Building a bear case that actually bitesOnly once we have a business we understand and a thesis we've tried to break do we turn to valuation. We estimate a range of intrinsic values under different scenarios, and define the price at which the risk-reward becomes attractive.
A great business bought at the wrong price is still a poor investment, so this step is where discipline meets opportunity.
Our approach to intrinsic valueThe final stage is a decision: buy, watch, or pass. When we do buy, position sizing reflects our conviction and the risk profile of the business. Beyond entry, decide is also about ongoing review, revisiting the thesis as the business and the price move.
The SQUARED process does not end at purchase, it repeats.
How we size and review positionsIf you want to learn the complete framework step by step, including the principles and decision-making process behind each stage, take the free Mindset SQUARED™ course.
Take the free Mindset SQUARED™ courseIf you want to see how we apply the framework to real companies, through our live portfolio and ongoing analysis.
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