Episodes

Dan Ferris:                 Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin:    And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we talk with Pieter Slegers, also known as Compounding Quality.

Dan Ferris:                 Peter is an excellent investor. He has got a brilliant mind. we have a wonderful conversation for you to listen to here. Lots of great ideas, lots of ticker symbols. Get ready to take notes and hear a lot of great ideas about investing. So, let's do it. Let's talk with Peter Slegers. Let's do it right now.

Corey McLaughlin:    For the last 25 years, Dan Ferris has predicted nearly every financial and political crisis in America, including the collapse of Lehman Brothers in 2008 and the peak of the Nasdaq in 2021. Now he has a new major announcement about a crisis that could soon threaten the U.S. economy and could soon bankrupt millions of citizens. As he puts it, there is something happening in this country, something much bigger than you may yet realize and millions are about to be blindsided unless they take the right steps now. Find out what's coming and how to protect your portfolio by going to www.americandarkday.com and sign up for his free report. The last time the U.S. economy looked like this, stocks didn't move for 16 years and many investors lost 80% of their wealth. Learn the steps you can take right away to protect and potentially grow your holdings many times over at www.americandarkday.com. 

Dan Ferris:                 Peter, welcome to the show. Really glad you could be here.

Pieter Slegers:            Thank you. It's an honor to be here, Dan.

Dan Ferris:                 So, you and I, we're of the same mind on a lot of these investment topics that we're going to be touching on today. I've spent probably – I started focusing on high-quality companies and not just the typical value-type investments − In around 2005, because in 2002 when we started the newsletter that I'm doing, 2002 is the bottom of the dot.com bust and there were all these companies trading for less than cash and all kinds of good situations like that. And by 2005 that was pretty much gone. So, I started recommending stuff like Walmart and Berkshire Hathaway and it just took off from there. And that has been much better than trying to find so-called value investments over the last 15 years or so.

                                    What I'm curious about is, it's a normal – what happened to me is similar to what happened to Buffett and Munger and a lot of people. They start out as value and then they wind up saying, "This is a little silly. I just want to buy great companies and hold them forever or for a long time." So, that's a typical thing. And sometimes before that, people even start out looking at charts and all kinds of – trying to figure out the chart patterns and all that business. Buffett did – he did something like that. It was odd lot research. He was researching odd lots.

                                    So, how did you get here? How did you get to a place where you have this Substack called Compounding Quality and you're really into high-quality businesses? What was your evolution? That's what I'm really interested in right now.

Pieter Slegers:            It's funny that you asked, Dan, also because definitely I would – in the beginning, I definitely would have considered myself as a classical value investor. So, trying to buy the cheap stocks based on a low price-to-book ratio, low price-to-earnings ratio, and so on. Well, I used to work in the asset-management industry. And one of the best things that the asset-management industry brought to me is, well, when I joined after university I, as mentioned, considered myself as a traditional value investor. And I had one bias too: I live in Belgium and almost my entire portfolio was invested in Belgian stocks. And there was one rule: as an asset manager, well, you can't own any Belgian stocks any more.

Dan Ferris:                 That's great.

Pieter Slegers:            Why – yeah. At that point in time it wasn't so funny for me, but in hindsight it was. Well, the underlying reason was that we also had a Belgian asset-management fund and the Belgian market size was quite – yeah, it's very illiquid. So, meaning that, for example, when I would buy a company for myself and then would buy it for the fund, well, you have an immediate 3% gain you are taking there. Well, it's called frontrunning. But it was also made illegal by the government but also by my employer. And that basically cost me to sell my entire investment portfolio or rethink my entire strategy. And that's – obviously, I've always been a fan of Warren Buffett, of Charlie Munger, and so on, and that's when I started to read a lot of books, a lot of things that have been written about quality investing, like Quality Investing, the book from Lawrence Cunningham, Only the Best Will Do, How to Pick Quality Shares. Well, with a friend last year I've also published my own book, The Art of Quality Investing. So, I started to dive into that topic and it immediately clicked to me, well, investing in the best companies in the world and you try to do it at a fair price, well, it makes complete sense, I think.

                                    What I think is very important, the fundamental difference with value investing, for example, and why I think – why I personally think that quality investing is a way better investment strategy is, obviously over the past decade, well, pure traditional value investors haven't been too happy probably with their returns. But what you try to do as a value investor is you try to find an undervalued company, you think it's valued too cheaply, you buy the company, and you hope that the undervaluation disappears. And when your investment thesis is correct, well, your initial reason for buying the company isn't intact anymore. So, you should sell the business and find or try to find another undervalued business.

                                    And that's – well, I do it again and again and again. And that's a fundamental difference compared to quality investing, where basically when you find a great business and your homework is correct, well, the intrinsic value will keep increasing, meaning that you almost never need to sell the stock. Warren Buffett said, well, the best time to sell a great business is almost never. So, as long as the intrinsic value keeps increasing, well, you can keep those kind of companies.

                                    So, I think also that quality investing is one of the only – or one of the few strategies where you can use a buy-and-hold strategy. And maybe one last point I want to make on here is obviously almost everyone who's listening will have heard of Warren Buffett already. Well, one really important point to make is indeed Buffett evolved under the influence of Charlie Munger from being a value investor to a quality investor. But the evolution started way sooner than most people suspect. So, when you look at 1972, his annual letter, there he said, "Well, I want to invest in companies when two criteria are met. One, on average over the past 10 years, the return on equity needs to be higher than 20%. And second point, well, the return on equity should never have been lower than 10% in a single year over the past decade."

                                    And that's probably also something quality investors are looking at. And 1972, it's also no coincidence that that was the year that Buffett bought See's Candies, or Berkshire Hathaway bought See's Candies. And since then, well, they really saw the power of pricing power, the power of buying a great business. And yeah, obviously over the past 50 years, investing in quality companies has done quite well. So, once again, Buffett was right.

Dan Ferris:                 Yeah, I'm glad you mentioned [See's Candies]. They put like – what was it, like, $35 million into it? And they've gotten a couple billion or so – billions out of it. It's amazing. It's been amazing.

Pieter Slegers:            Exactly. And also, the funny part there is that Buffett has said multiple times "Well, when the price from buying See's Candies would be $100,000 USD higher, I would have walked away." And it has delivered him, well, I think over $2 billion by now.

Dan Ferris:                 Yeah, the last time I checked, it was like $1.8 billion or something like that and now it's got to be over $2 billion. I agree. So, yeah, quality is not a bad idea. The best time to sell a quality business is never. You just want to keep it. I remember at some Berkshire meetings, Charlie Munger − he usually didn't have a lot to say but then when he had something to say, he really said it well. And several times over the years, he used this phrase, he says "Here we are. We've got all these businesses just pounding out money." I'll never forget that: "Just pounding out money." And it emphasized what is really happening under the hood. It emphasized that for every dollar of capital they put to work, they were getting, in the Buffett example, no less than $20 back out of it, which is incredible. I'm sorry, for every dollar, no less than 20 cents for a year, back out of it. And over time, those 20 cents a year just add up and up and up and up, and it's compounding on top of compounding it, and it creates what Munger might call a "Lollapalooza Effect."

                                    And you can see it like in companies – one of my favorite charts to look at is a Canadian company called Constellation Software. You know them?

Pieter Slegers:            Yeah.

Dan Ferris:                 Very high-quality business, rolling up software companies. I mean, of all the things to roll up: very little capital required, huge returns, gushing cash flow. And it's a thing of absolute beauty. It is the picture of compounding. It's just like this huge ramp. That's what you're looking for, ain't it? That's the Holy Grail. That's the goal.

Pieter Slegers:            Yeah, exactly. And the funny thing there – obviously, Constellation Software, Mark Leonard, it's a beautiful business. I'm personally – or also with Compounding Quality invested in the spinoff, Topicus –

Dan Ferris:                 Topicus,  yep.

Pieter Slegers:            – which is a small – on the European VMS companies, European vertical market software. I hope that I – and we have an appointment scheduled, with fingers crossed, to meet management in March, in a few weeks from now. So, that would be cool. And indeed – you're always looking at the big winners. And I stole that one. Well, [inaudible] provider – I'm a shameless copycat from Warren Buffett and Terry Smith. Well, how are you trying to find quality companies? It's, one, you try to find wonderful companies, obviously. Two, one thing that I really think is underestimated nowadays is the power of management and the power of incentives. Well, Charlie Munger, "Show me the incentive and I'll show you the outcome." I only – or 70% of my portfolio is invested in companies where still that founder or where management owns a significant stake. It doesn't mean that by definition it will be a great investment, but it means that your incentives are aligned.

                                    And also, well, Harvard Business Review, for example, has shown that founder-led businesses outperform by 3% to 4% per year on average. So –

Dan Ferris:                 Per year.

Pieter Slegers:            Per year. Exactly.

Dan Ferris:                 That's huge.

Pieter Slegers:            So, what I personally try to do is I try to combine different criteria, rational criteria, that on their own tend to do better than the market, like founder-led businesses, for example, and you try to combine them and try to form a winning strategy. Same for, for example, wide moat companies, or companies with a sustainable competitive advantage. Well, yeah, for example, the Morningstar Wide Moat Index, that's solely investing in companies where they think they have a moat. Well, that index has also outperformed by 4% since 2005. And by combining all those criteria, you try to find – or combine and find an investable universe that hopefully, rationally seen, should outperform the market. And based on that investable universe, you try to form your portfolio.

                                    So, you have the first criteria, a wonderful company. Second one, skin in the game or founder-led businesses. And obviously, those are often great companies. And then, a lot of them in the investible universe as well, for example, they're trading at very rich valuation levels. And then it's the art or the craft, I think, to try and buy them at reasonable valuation levels.

                                    There's a famous saying, which you definitely know well, "Cut your losses and let your winners run." And I try to live by that statement, but I also think it's funny when you're looking for investment inspiration, well, "Cut your losses, let your winners run," you can also invert that and just look at which kind of companies have been the winners over the past decade, for example. And that a company has been a winner over the past decade, it definitely doesn't mean that it will continue to be so. But what I think is a very strong indication is that when the same CEO has been leading the business for over a decade, for example, and it has done tremendously well… Well, then you know it's a great business. You have a strong indication that the CEO has done well in capital allocation, so that already tells you a lot.

                                    And for example, another example I can give is Medpace. It's an American business, a clinical research organization, so they help biotech companies to execute their clinical research. Well, the stock has done tremendously over the past few years. It's a multibagger. August Troendle founded that business in 1992 and he's still the CEO today and his total net worth – well, depending on the fluctuations of the stock price, of course – but his total net worth will be something like $2.2 billion, and $2.1 billion of that will still be invested in Medpace stock nowadays. And to me, well, it's a strong indication that incentives are aligned, that he has done something well in the past, and hopefully, those kind of companies can continue to do so in the future. And when you look at the market and the expectations for Medpace, well, the CRO markets, credit research organization markets – well, it's clinical research, apologies – is expected to grow by roughly 15% per year. Well, that makes me still very optimistic about the business.

Dan Ferris:                 That universe you describe of founder led-companies, long-tenured CEOs, that doesn't sound like a very large universe. Is it very large?

Pieter Slegers:            So, the universe – and it's basically funny that you ask. I will tell two things. The first one, to answer your question, well, the universe today contains 149 companies. And I invest worldwide. So, knowing that there are 60,000 listed businesses and only 149 remain, well, that tells you something. But on the other end, I'm also quite comfortable to state that when you, for example, would create an equal weight ETF with all those 149 companies and just let it run for 10 years, 15 years, I would be quite comfortable to state that it will do very, very well, basically.

                                    Out of those 149 companies, you have a lot of businesses like Constellation Software, like Copart, Mastercard, Nvidia. But the tricky thing there, is a lot of them are trading at rich valuation levels, so you are excluding them for your portfolio. But I think it makes a lot of sense. And one thing I was doing just before we entered this podcast is I created a list also with – I think it were 800 companies in the United States, 800 listed companies in the United States, where the insider ownership is larger than 8%. So, what I was, for example, doing, to give an indication, is indeed you have those companies. Insider ownership is great – so, that's something you want to see.

                                    And then you are going to trim down the list further. How am I going to trim down the list? Well, I'm looking at, for example, I want to return an invested capital higher than 15%. I want a profit margin higher than 10%. Also there, well, when I did that exercise, out of those 800 companies, only 50 remain. So, you are – basically, you can look at the investment process a bit like a funnel. So, you start with the broad market, and then you start – you enter the criteria of – obviously, stay within your circle of competence, only invest in companies you understand. Maybe out of the 60,000 − 30,000 remain. Then you are going to enter all your quantitative criteria, like your return on the invested capital higher than 15% and so on. Only, well, let's say 500 companies remain. You enter an extra criteria of only companies where there is skin in the game, and that's how you are filtering everything down.

                                    And I think that's the beauty of investing internationally. You can be very strict with your criteria. Well, once again, Warren Buffett, you can have a yes pile or a "to investigate" pile, a no pile, "I don't want to invest in this company, in those companies," but also a huge "too large" pile. So, for example, same for me, a lot of questions – a lot of U.S. people, because I live in Belgium, I live a 30-minute drive from ASML, for example, the semiconductor machine manufacturer. A lot of people in the U.S. ask me, "Well, what's going on with ASML? Should we invest in it?" Well, for me, short answer, semiconductors are cyclical. I don't like the Taiwan risk. I don't like the China risk. So, all semis are a no for me. So, I just put it on my "too hard" pile.

                                    And yeah, for me investing is all about saying no as soon as possible because you – every single day with the Internet nowadays, so many ideas are shown to you every single day, minutes. I like to – when someone pitches me a stock to try and find a reason to say no within 90 seconds. In 98% of the cases you can find one. And probably sometimes you will throw away the – is it a saying in English? – Is don't know – the child with the bathwater. Do you know what I mean by that?

Dan Ferris:                 Yeah, the baby with the bathwater.

Corey McLaughlin:    The baby with the bathwater, yeah.

Pieter Slegers:            Exactly. But that isn't bad, if you ask me, as long as the companies that remain within your universe, that those companies are great, and that hopefully your portfolio outperforms the market because that's the goal for everyone probably.

Corey McLaughlin:    And you mentioned the Internet, the flood of information that we have, and obviously Buffett and your interest there. I know from following you for several years, at least on Twitter, that you were completely anonymous at the beginning, just "Compounding Quality." We wouldn't even be having this podcast. And then, I know at least that Buffett and Munger, I believe, noticed your work, right? And I'm curious if you could tell our audience that story and then how you kind of had to – you revealed yourself after that.

Pieter Slegers:            Sure. So, basically, I was working in the asset-management industry but I also always wanted to become a teacher. And as a result, well, sometimes on Twitter – or, you should say X nowadays from Elon Musk – I loved to educate people about investing. And on a given day, well, my employer came to me and he said – well, he didn't say it that way, but that was basically the message – "Just talk about the fund you manage, talk about our company, and for the rest shut up." That was basically the message.

                                    And I'm a bit stubborn and I also like my independence. So, on a given Friday night, I decided "Well, let's just create a Twitter account and start to tweet anonymously about the stock market so I can say whatever I want to say whenever I want to say it." So, first step, OK, name for the account: Compounding Quality. So, magic of compound interest by investing in quality stocks.

                                    Now, the second step, a profile picture. And I never – I didn't think about it, but yeah, I wanted to stay anonymous. Obviously, he was a big hero, Warren Buffett, so I just looked on Google for some kind of cartoon of Warren Buffett. Found one. So, the Warren Buffett cartoon with a red background, that was basically the logo of Compounding Quality. But I started the account just for fun. Obviously, I never would have thought that the account – well, on Twitter, there are a bit over 400,000 followers right now – that it would become so huge. And after a few months when Compounding Quality probably got 150,000 200,000 followers, I knew that having that logo might be a risk, but I also didn't want to change it because after a while the logo became somewhat iconic. It was very recognizable on social media and on the niche [inaudible] and so on.

Corey McLaughlin:    Yeah, I definitely associate it with you. Yeah.

Pieter Slegers:            Yeah, exactly. So, everyone knew the logo, so I didn't want to change it. And then all of a sudden I needed to change it very rapidly because I got an e-mail from Munger, Tolles, & Olson, which the law firm that Charlie Munger used to be a lawyer for, a  partner for, and they also defend Berkshire Hathway basically nowadays. It was a very friendly e-mail, which is good. But they basically said, "Well, we noticed that you are using a logo with Warren Buffett.  Some people think that Warren Buffett is involved. Would you mind changing the logo?" Obviously, Warren Buffett isn't involved and that's a big compliment, but at that point in time I was freaking out a bit. So, I needed to change the logo as soon as possible.

                                    Well, the thing I did is 30 minutes later – like I said, the logo became iconic, so I didn't want to change it. So, the best I came up with that day is to try to replicate the logo, but then with my own face. So, same style, the red background, and that's how we did it. So, I want to apologize to everyone that they need to look at my face now because I'm not as sexy as Warren Buffett is. But it is what it is. And yeah, that's how it happened. And I love the fact how very friendly they also approached me, and it shows integrity and transparency are very important for Buffett, for Munger. It's also what I want to stand for. That's also how I went out of the anonymity and people found out who was running Compounding Quality, basically.

Dan Ferris:                 Good story.

Corey McLaughlin:    It's a good story. It's an awesome compliment too, that they reached out that way, not so aggressively. A compliment that he would be involved – that some people thought he was involved obviously has got to feel good. Yeah.

Pieter Slegers:            Exactly. And that's also – probably in hindsight, I think it's very good that event basically forced you to get out of the anonymity. Because we are talking about finances, we are talking about money, we're talking about investments − I think people don't have the right to know who you are. And also, in the beginning, I recall I had a lot of discussions with other people. Well, running an investment newsletter, you shouldn't show your portfolio because for every active investor, well, the market underperforms from time to time and so on, which is 100% correct.

                                    But I think that when you are charging money for a subscription service about investing, one, people have the right to know who you are. And two, they have the right to know what's in your portfolio. Because when someone pays me to – for my investment research and I can't manage to outperform the market in the long term, well, I can – people can spend that money better on other things. And I can better – I can also do better to do other things, go fishing or go walking or whatever. Because when you don't generate any added benefits to your readers, well, then it doesn't make any sense.

                                    And I think that's very important also there. Show me the incentive and I'll show you the outcome in the [inaudible] space, in the fund space. When the person you are talking with, the person who is giving you advice, the person who is selling you an investment fund, isn't invested in it themselves, well, that tells you a lot. So, I would only invest with people who are invested alongside you.

Dan Ferris:                 That would probably get you with a lot of good-quality people who − their skin is in the game. The definition of "skin in the game" is that you're exposed to the downside as well.

Pieter Slegers:            Yeah, absolutely.

Dan Ferris:                 So, I think that would probably be a very good idea. If you're giving capital, if you've got savings and you're giving it to somebody, you don't want them to be doing something different. You don't want them to just be charging you a fee and doing whatever with money. The skin in the game, I think – I agree. And really, for me, it's when you are focused on managing people's money especially – I mean, you're talking about selling subscriptions. We do that too. But there's something about managing the money where if you hand it over and it's just sort of – we all own random kind of mutual funds and things in 401(k)s and whatnot. But I hope we all understand that the primary reason to do that is if the cost is very low and the portfolio is diversified enough that it's kind of a market portfolio, so, you're not trying to shoot the lights out or anything. And that's about cost. Otherwise, you'd better hand it to somebody who's really in the game, as you describe.

                                    And I'm just – I'm saying the same thing over and over again because there's just no other way to say it. And it's that important and needs to be said, put it that way.

Pieter Slegers:            Exactly. There's also maybe – If I can pick your brain also on that one, Dan, and I don't think anyone has ever done it, but we are looking into it, to launch an equity fund as well. So, which kind of structure should you use? Well, very easy. Warren Buffett – copy/paste, meaning taking his structure from the Buffett Partnership, the 0/6/25, meaning that you don't charge any fees if the return is lower than 6% a year and you charge one-quarter of every return over 6%. And one thing we are looking into now with lawyers and so on where it's possible – so, we want to use the 0/6/25, and on top of that, of the potential fees that you would generate if the return is good – so, you only pay if the return is good – and of that potential fee, we would want to distribute 50% to charity.

                                    And I don't think – but maybe I'm wrong. I didn't find it yet. I don't think anyone has done something like that in the past. I also –

Dan Ferris:                 Chris, Chris Hohn gives a lot of money to charity. I'm not sure what the model is, though. I'm not sure if exactly what you describe, but that's – and it's called [The Children's Investment Fund]. I don't know of anybody else. I'm sure there are others, but off the top of my head, that's the only one.

Pieter Slegers:            Yeah, exactly. I just think it's a beautiful model to work with, basically, to do the right thing.

Dan Ferris:                 Yep. Yeah. And that's kind of a very – that's a very Warren Buffett kind of a thing as well, because he's a well-known philanthropist. Why you'd give all your money to Bill Gates is another question that maybe we'll talk about another time. I think it's insane, but hey, I'm not Warren Buffett, so I'm sure he knows a lot more than I do about what Bill Gates is going to do with the money.

                                    So, good luck with that. I hope that you – I hope you succeed with that.

Pieter Slegers:            Thank you.

Dan Ferris:                 Have you begun to put this together yet or no?

Pieter Slegers:            Obviously, the newsletter was easy. You just open your laptop and you start writing. Launching the fund is a bit more difficult. So, looking at all the regulatory points of use, where to structure everything – because I'm in Belgium − a lot of clients or potential clients are coming from the U.S., when you – then you need to structure in the U.S. or the Cayman Islands. Well, European people don't want the fund in the U.S. They want the in – usually it's Luxembourg. So, looking into everything there regarding structure, where to base the fund. And the goal – hopefully it should be September this year to launch it.

Dan Ferris:                 All right. Well, maybe we'll check back with you in September and see how you're doing. Or maybe we'll wait. We'll give you a – we'll give you until September, then we'll wait a little bit, see how you're doing, then we'll check back.

Pieter Slegers:            Sure. Perfect.

Dan Ferris:                 Yeah. Are there any individual names right now that really excite you as a new investment that you do want to talk about? If you don't want to talk about them, that's cool. I get it; you have paid subscribers. But are there any that you do want to talk about?

Pieter Slegers:            Sure, I'm probably looking into two companies right now. The unfortunate thing is those are two companies non-U.S. listed. Does it matter to you or should we talk about U.S. stocks?

Dan Ferris:                 It doesn't have to be U.S. My main thing, Pieter, is to get the stuff you're most excited about. That's what I want to hear about.

Pieter Slegers:            Sure. So, basically what I can tell – and I've already given some names, but that's no worries – I'm invested in – just like Buffett used to do, but he sold it after one quarter – I'm invested in Ulta Beauty. So, the U.S. beauty retailer. Basically it's a cannibal stock. So, they are buying back stocks for $1 billion a year, meaning around 5% of the outstanding shares at current valuation levels. I bought it in October 2023, I think. It went well, went up 50%, and then it lost all its gains again.

                                    So, Warren Buffett also bought it – or Berkshire Hathaway. Warren Buffett himself didn't do it probably. But Berkshire Hathaway bought it and sold it after one quarter. I think one of the main reasons is that just the U.S. beauty-retail landscape is very competitive and probably also more competitive than I initially thought. And what you see is that Sephora, which is a part of LVMH, the French luxury conglomerate from Bernard Arnault, they are doing tremendously well. So, in the higher luxury category, things are fine. When you go down a bit, for retail, things are very hard.

                                    And I'm seriously considering – and I'm probably doing it – to switch or swap, yeah, Ulta Beauty for Sanlorenzo. And you've probably never heard about Sanlorenzo –

Dan Ferris:                 Never heard of them.

Pieter Slegers:            – or you would surprise me. So, Sanlorenzo, basically, it's also in the luxury industry. It's an Italian company and they are basically active in luxury boats. So, they are targeting the ultra-high-net-worth individuals. When – I'm still trying, but when you want to buy a boat at Sanlorenzo, it will probably, depending on what you want, cost you $10 million, $20 million USD. So, it's quite expensive.

Corey McLaughlin:    That's why I haven't heard of it.

Dan Ferris:                 There we go.

Pieter Slegers:            You'll get there. You'll get there over time. What I truly like about the business is, one, it has been led by the same guy, the CEO who has been running the business for over 10 years. He owns 56% of the shares. And he has also quite heavily been buying shares recently. So, the company has a return on invested capital, which is quite high. It's also one of the best run luxury-boat companies worldwide because, for example, when we look at the financial crisis, we see that a lot of those luxury-boating companies, they definitely struggled while Sanlorenzo was one of the few companies that managed to keep growing even during the financial crisis.

                                    And the fun thing there as well, it only trades at 11 times earnings right now. And they are using some share buybacks. The consensus states it should grow its EPS (earnings per share) by 12% to 13% per year on average. So, that is definitely something I want to invest in. Or, I'm probably looking to switch Ulta Beauty from Sanlorenzo. And also, maybe which is more interesting for people with solely U.S. perspective, what I think is really important is to look at what the secular trends are, what the structural growth markets are, and just invest alongside them. And it almost has never been a mistake.

                                    One thing that I really feel bad about for myself is that in the end of 2023, for example, I wanted to buy the private-equity company KKR, which is an amazingly led business, and I think they are up 60%, 70% since that point in time. Those companies that are growing in structurally growing end markets like private equity, like cybersecurity, Fortinet, for example. Like Arista Networks in AI, well, I always think I'm too late and I'm still somewhat a value investor, so I don't like to overpay. And I've been sitting on the sidelines and always when I find a great business in a structural trend that is trading quite expensive, well, in hindsight, I should always buy it.

                                    Well, another example I can give ,when I was working on the trading floor of one of the Belgian companies in '09, I think, 2009,  I was making a report about batteries for EVs and EVs in general and so on. And people were talking about – or, I needed to write something about Tesla, about BYD. And I was truly interested in BYD but I thought "Well, I'm way too late. Everyone knows that the transition is coming. Everyone knows that BYD will do great in making electric cars." Well – and I should look it up – since 2009, I would definitely have wanted to own BYD. So, those structural trends, they are really attractive, if you ask me.

Dan Ferris:                 This is worth talking about. It's a standard foible of someone who is looking to invest in high-quality companies. They look at it, they see it's run up 50% in the past year or two or something and they go "Oh, I missed it; I'm too late," when the idea is to compound money over a long period of time. However, it is not completely wrong to assume that everybody knows that a certain business is a really high-quality business. In fact, this is – I hear this from Howard Marks. Every time the subject of quality comes up – and Marks is no fool, he's not an equity investor, he's a debt investor. But he's no fool. And he knows markets well and he knows investing well. And he likes to say, "It's not about buying great companies. It's about buying companies well."

Pieter Slegers:            Yeah, exactly. I also think it's about –

Dan Ferris:                 But you and I both know that I've whiffed Constellation Software numerous times. I've looked at it a million times, "Ah, 30 times earnings or whatever. I can't do it." And it just goes up and up and up because they're pounding out money, as Charlie Munger said. And they're pounding out money at huge, high returns. How do you think about all this?

Pieter Slegers:            Yeah, sure. I think it's an important one because on the one hand, you can make the statement indeed: Those companies, great companies, they keep compounding. Same for me for Constellation Software. I'm waiting, but I've been waiting for over a decade, so it's just a –

Dan Ferris:                 Same here.

Pieter Slegers:            On the other hand of the story, well, even the best company in the world can be a terrible investment if you overpay for it. Just look at Walmart in the beginning of the 2000s. We briefly touched upon it in the beginning. Well, from 2000 to 2015, something like that, I think the intrinsic value, just very simplistic book value per share, the intrinsic value doubled and the stock price went nowhere. Same for Coca-Cola in the '70s. So, that's something that can happen.

                                    And I think it also depends on how much risk you want to take. And I'm never willing to overpay or pay very rich valuation levels. For example, I wouldn't feel comfortable to buy Constellation Software today or a company like [inaudible] or Zoetis and so on.

Dan Ferris:                 How about Palantir? It's only 400 times earnings.

Pieter Slegers:            Exactly. Palantir, another great example. And I think a very important point to make with quality investing is the great strength and the reason that quality outperforms in the long term is that people tend to underestimate how long those kind of companies can grow at above-attractive rates. So, everyone knows a classical DCF – discount-cash-flow – model and you try to predict the cash flow over the next 10 years and then you go to a perpetuity growth rate. Well, what happens often in quality stocks is that those companies can grow for 15 years or 20 years at above-attractive rates. And whatever assumptions you make in such a DCF, when that's correct, almost every company is undervalued. But, it's also a very dangerous assumption to make that a company can grow at 10% per year for 20 years, for example, because when your thesis or when your assumptions aren't correct in that case, well, you have a double-edged sword. Your valuations will come down tremendously; the growth will come down.

                                    So, for example, I did an exercise for Nvidia as well a few months ago to justify the current stock price of Nvidia. And to have or to generate a return of 10% per year as an investor over the next decade, well, Nvidia should generate as much cash flow as all the big tech companies combined: Facebook, Amazon, Apple, Netflix, and so on and so on. Is it possible? Might be. Is it plausible? I don't know. It's not a risk I would feel comfortable taking, but I also think it's very important to highlight that in the stock market there are multiple roads that lead to heaven or multiple roads that lead to Rome. Multiple strategies can work and it's very important to pick the strategy that fits you as an investor because, for example, we're talking about quality investing here, and by definition, every active strategy will underperform the market from time to time. When you just follow someone else's conviction, someone else's stock ID, well, you can copy someone else's stock ID, but you can never borrow their conviction.

                                    Let's say that I'm buying Sanlorenzo tomorrow and, Dan, you buy –  you hear this and you buy it as well. And over the next few months, Sanlorenzo goes down 30% and you don't hear anything from me, and you don't know what's going on. When it isn't your conviction, it will be very, very hard to stick to the plan and keep disciplined. So, I also think that's very important.

                                    Maybe one last point regarding valuation: while working in the industry, there we build those thousand-row Excel files where we make a 1,001 assumptions to try to determine the intrinsic value to two decimal spaces. It doesn't make any sense if you ask me, so I think it makes way more sense to use rule-of-thumb formulas. Well, try to build your valuation on a napkin and if you can't, it's probably not a screaming buy. One funny –

Dan Ferris:                 That's a great point.

Pieter Slegers:            One day I was looking at waste management – so, the U.S. waste collector. And I was an analyst – and I won't name the name of the institution for – to show some respect. I was looking at this DCF and all of a sudden in year five, there was a huge spike in the growth, in the expected growth of the free cash flow. It went from 7% per year to 12% per year. And I didn't know what was going on. So, I reached out to him via e-mail. "Look, in year five, there's a huge spike in your growth assumptions. What's going on there?" And in the Excel it showed that there was a – he expected from year five a growth via M&A, mergers and acquisitions, of 5% a year. And he responded to me "Yes, I know it's weird. But when I didn't –  when I don't do this, my intrinsic value is too far away from the stock price."

                                    So, that was his answer, literally an e-mail –

Dan Ferris:                 Incentives, huh? Incentives.

Pieter Slegers:            Exactly. So, it's an example of being –

Dan Ferris:                 This is – no, this is the flaw in that whole method, though, isn't it? Because you're plugging in – when you do discounted cash flow, you're trying to predict the future, bottom line. And what folks don't understand is when people like me shout about how overvalued something like Palantir or some other company is, in a typical model of discounted cash flow you would be paying maybe, let's just say for the sake of argument, you should pay 20 cents for the 20th year of earnings. You should pay 20 cents for that year today. But most people, well, they'll try to justify it or something; they'll wind up paying 50 cents. And then in the market the price will run up, so you're paying a dollar for a dollar of earnings at 20 years from now. That's nothing. In real terms, you're losing money on that.

                                    And they don't realize that when the reality plays out and the growth disappoints and the market falls or whatever, that year is going to be worth 80% or 90% possibly less than what the whole world says it absolutely is worth this minute. I've been trying to make this point several ways but you just made it in a very good way by showing the incentive of the typical institutional analyst to justify the buy rate. He's not trying to figure out the value. He's justifying his buy rating. And it drives – it drives people like us nuts.

Corey McLaughlin:    Yeah, it drives people crazy when they hear it.

Dan Ferris:                 Yeah. But to them, it's like, "Hey, I got a paycheck to justify here, so to justify my paycheck I've got to justify the buy rating." It's an endless cycle of incentives. I'm very glad you mentioned that. Major, major pet peeve is just the use of DCF in the traditional way, and then as a justification just plugging anything in the works. I mean, it's just obvious, isn't it? It's silly.

Pieter Slegers:            Exactly. And that's also why personally I never use a DCF but always use the reverse DCF.

Dan Ferris:                 Yes. That's exactly what we do. That's exactly what we do. Go ahead. You explain it.

Pieter Slegers:            We seem to be on the same page, so that's fun.

Dan Ferris:                 Yes.

Pieter Slegers:            But yeah, you know the concept, but you just turn it upside down, right? And you just look at what – you don't make any assumptions yourself but you just look at what is implied in the stock.

Dan Ferris:                 In the current stock price. Right. Exactly.

Pieter Slegers:            And then, it "sounds easy," but in practice, it's more "difficult."  The only thing you need to do, still need to do is determine whether those assumptions implied in the stock price are realistic or not. To take an example, when you do a reverse DCF – or Copart, for example, right now in the U.S., the company which is the eBay of total loss cars or whatever you want to call it –

Dan Ferris:                 Yeah, junkyards or something.

Pieter Slegers:            Exactly. Well, Copart is a beautiful business, but when you do a reverse DCF, they should grow their free cash flow by 18% per year to generate a return of 10% per year to a shareholder. That's quite expensive, and that explains why personally I don't want to own the business right now. And also, to give another example, when LVMH, for example, the French luxury conglomerates, when you do a reverse DCF at LVMH they need to grow their free cash flow by 9% per year to return 10% per year to shareholders. And –

Dan Ferris:                 Right. So, Pieter, let me ask you something. In Copart's strategy, their competitors don't own the land. And that seemed smart for a while but it's turned out to not be smart anymore. And so, Copart has this massive advantage because they own land in places where nobody wants to put another junkyard and they're crowded places and it's really prime land. So, don't you think – I mean, the land is in the valuation. We just – I just assume that.

Pieter Slegers:            Yeah, sure. It's a very important point to make and I'm not sure whether we can dive into this or whether it will bring us too far. But every different valuation method has its disadvantages. And to me, I always use three different ones. The first one is very naive. Just compare the forward P/E with the historical average. Very naive because you look – need to look at the entire situation, what's going on, the outlook and so on. But that's a – you can get a first indication in a minute, which is the fun thing about it.

                                    The second one is the reverse DCF. But what is very important, and that's – I love the fact that you brought it up, Dan. In the reverse DCF, strong, somewhat-expensive businesses or growth companies always get a disadvantage because they are expensive. But, for example, when you compare Copart to General Electric, for example, the reverse DCF is exactly the same. But Copart shouldn't trade at the same valuation level as General Electric, because Copart is a way better business, and that's not taken into account with the reverse DCF, for example.

                                    So, that's one of the disadvantages of the reverse DCF, and that's also why I always use a third evaluation method, and that's an earnings growth model. And it's – I don't think many people use it. I basically did – made it myself, the formula, but I'm sure other people use it, but not sure if anyone popularized the term. Well, it's very, very easy to calculate your expected return as an investor, in theory at least. Your expected return as an investor is always equal to the free cash flow per share growth, plus the dividend yield, plus or minus the change in the valuation.

                                    Obviously, you need to make some assumptions there, but when you do the exercise there, companies like Copart, they will already look a bit better. Why? Well, I think you might know Copart better than I do, Dan, but for example, free cash flow per share growth could be 12%, 13%, 14% for Copart. Let me look it up. I don't think Copart pays a dividend, does it? It also makes no sense for them because they can reinvest at very attractive rates. And then, indeed, the valuation of Copart is quite – is somewhat expensive: 40 times earnings. But when you see the fair exit P/E, because they have such a strong competitive advantage with the strong and strategic junkyards and so on, a fair P/E for – of Copart – for Copart of 30 or even – for me, I want to be conservative – 30, maybe 25 could be perfectly valid. And then, when you would do that exercise, you still get an expected return of 11%, 12% for Copart. And compare that to General Electric. Well, I think we all agree that a fair exit P/E or a fair P/E for General Electric at this point in time isn't 30.

                                    So, what I often see when I'm looking at stocks, is that a company like Copart is tremendously overvalued based on the reverse DCF but it's also undervalued on an earnings growth model, for example. And just looking at everything helps to try and make an educated guess about how rich the company is valued. And in an ideal situation, the company is undervalued based on all three metrics. Forward P/E lower than the historical average; earnings growth model, an expected turn of higher than 12%; and then the reverse DCF where the growth implied in the stock price is lower than what you think the business will grow at in the future.

Dan Ferris:                 My favorite sort of rule of thumb return at a glance, knowing nothing else, is dividend yield plus recent dividend growth. I'll usually – I'll just eyeball the dividend growth, maybe take five years or whatever seems like I'm not trying to make it look better than what it is. If it's got a period, for example, of, like, six years of 8% dividend growth, OK, there's something interesting happening there for those six years. Maybe it goes on for another six. And if it's yielding 3%, I'll say, "OK, I wouldn't mind making – [3% plus 8%] is 11% a year for six years, let's just say." So, that's my quick sort of back-of-the-envelope that I sometimes – I don't really use it. It's like you say, it's that quick 10-second look at something. Which is always – you've got to start somewhere, don't you?

Pieter Slegers:            Exactly. Another easy one that Terry Smith from Fundsmith is using, for example, is your expected to return is equal to the free cash flow yield plus the free cash flow per share growth. So, it's very similar, very easy.

Dan Ferris:                 There you go.

Pieter Slegers:            And it's a good – or great rule of thumb.

Dan Ferris:                 That's a good one. All right. Well, we've got rules of thumb. We've got lots of stocks to talk about for our listeners and lots of other good stuff. So, we're at the time when I'm going to ask my final question, which is – it's the same final question for every guest, no matter what the topic, even if the topic is not finance, which we do every now and then. It's the same final question. If you've already said the answer, feel free to repeat your answer. So, the question is simple. If you could just leave our listeners with one idea today, one takeaway for them today, what would that be?

Pieter Slegers:            Should it be a stock idea, general idea? It could be anything?

Dan Ferris:                 Anything. Some people say, "Be kind to your neighbors," and they leave it and that's their idea. Anything you want.

Pieter Slegers:            Sure. I think I have one in my mind on top already. I just think to keep growing and be a learning machine. I definitely don't consider myself, for example, as the smartest guy in the room, or I don't even think I'm smart. For example, at the asset manager, we were 20 employees in Belgium, rather small. And I hope I wasn't the dumbest one, but I would have been pretty close.

Dan Ferris:                 [Laughs]

Pieter Slegers:            But how can you offset it? Just by reading as much as you possibly can? And I'm working full time on Compounding Quality right now. The first thing I do, every first two hours –  and I'm a morning person, an early bird – every day between 5:00 a.m. and 7:00 a.m. I just read. And that's it. And I think – I'm keeping track right now – last year I have read 91 books. And basically all great ideas I've had from a business perspective, but also from an investing perspective to solve problems that are going on in your life maybe, everything can be found in books and by reading, buying a $20 book and basically learning from the best person in the world about a certain topic. That's amazing. And when you combine that, those books, with having some great mentors in your life, people who are maybe farther than you in what you are doing, well, that's a very powerful combination.

                                    And one thing that I definitely learned since I became an entrepreneur, since I started working for myself, is if you reach out to people, asking for help, asking for advice, you will be surprised how many people are willing to help you. Especially people with a lot of experience, they love to help other people get along the way. And well, there is also a book, Ikigai. Find your purpose, helping other people, and help them growing.

Dan Ferris:                 Ikigai. Yeah.

Pieter Slegers:            That's also something beautiful, I think.

Dan Ferris:                 Yeah, Ikigai is interesting. That's a great answer, Pieter. Thank you very much for that. And thanks for being here.

Pieter Slegers:            Thank you.

Dan Ferris:                 It's been really a lot of fun. I knew it would be, but yeah, it's great.

Pieter Slegers:            Next time let's do it face to face and that will be even more fun.

Dan Ferris:                 Yeah, that sounds great. Maybe we'll go to Belgium and do a podcast over there.

Pieter Slegers:            Always welcome.

Dan Ferris:                 That's great.

Pieter Slegers:            We can get some waffles and a beer and we can talk.

Corey McLaughlin:    All right.

Dan Ferris:                 You're talking my language with the beer anyway. All right, Pieter, thanks a lot and we will talk to you again.

Pieter Slegers:            Thank you very much. Have a lovely day.

Dan Ferris:                 You too.

                                    Well, we kind of knew how that was going to turn out anyway, and it did, right? So, we knew that it was very much of a "same page" kind of an opportunity. But that doesn't matter because just hearing him talk about his process and his views was well worth it. I think he seems like a really, really great investment mind to me.

Corey McLaughlin:    I think so. And the way he presents it, if nobody's familiar with his work – I mean, probably – well, you are now, but his actual – what he's posting every day in his newsletter on social media, at least you know, it's almost inspirational in terms of that wisdom that he's sharing for quality and long-term investing. It's reassuring. So, I was happy to meet him, happy to talk to him, as I am not a bottoms-up analyst expert. And so, to hear you and him go back and forth on that was nice. For better or worse, my mind is a – more of a macro mind. So, that was cool to hear you guys talk about that too.

Dan Ferris:                 Yeah, lots of fun. And I'm glad that we got a chance to just throw out a lot of names and give folks an idea of what we mean by quality companies and why and the challenges of buying them when they appear to be consistently expensive and you don't want to overpay. It's difficult. It's not – none of this is easy. People – I don't want to make it sound to you "Well, just focus on quality and you'll be great." OK, I mean, that's where you start, right? That's not where you end up. But yeah.

Corey McLaughlin:    I loved his point about incentives. That's just something that I think a lot of people don't understand that is very important. That is underestimated, the power of incentives in the ownership structure, CEOs. If they want the share price to increase in value, you can't imitate that from the people that are leading the entire company. So, it's really something that I that I know – when I got into this, I never really thought about it − that you think – well, investing specifically, you think about what motivates people and why is somebody doing this? But you could find what the incentives are of these executives in filings and whatnot and specifically what their benchmarks are and stuff like that. And that, I think, is totally underestimated and the fact that the universe of founder-led quality companies that he also brought up is fairly small, which is kind of nice when you, when you boil it down to, I think – what did he say, 150 companies or something?

Dan Ferris:                 Yeah, it was a stroke of genius when he said "I just want to say no as quickly as possible."

Corey McLaughlin:    Yeah.

Dan Ferris:                 In 90 seconds I want to say no.

Corey McLaughlin:    To whittle down all the potential companies to a couple hundred. And I mean, that's awesome. So…

Dan Ferris:                 Yeah, it's great. Yep. Good investor. Smart guy. Nice guy. Great, great guy to talk with. He will definitely be invited back. We've got to get our asses over to Belgium next time and –

Corey McLaughlin:    Yeah, take the microphones and we'll go.

Dan Ferris:                 – eat waffles and drink beer. That's right. And do it person-to-person, as he suggested, next time, face-to-face.

                                    All right. Well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really, truly did. We do provide a transcript for every episode. Just go to www.investorhour.com, click on the episode you want, scroll all the way down, click on the word "transcript" and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com, please. And also do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram; our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want us to interview? Drop us a note at [email protected] or call our listener-feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.

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