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The Anatomy of a Compounder

Global Equities

BNP Paribas Asset Management

Key Takeaways

  • Compounders are companies, that can deliver sustainable and long-term growth.
  • We believe the biggest opportunity in equity investments is to look for companies that can compound their earnings over many years or even decades. However, simply buying the highest growing companies is fraught with risks.
  • We emphasize sustainability of growth over magnitude of growth. Identifying sustainable growth businesses is irrevocably tied to the holy grail of investing – namely compounding.
  • If higher growth companies deliver on their estimated growth, the valuation profile would look quite different, with the most expensive companies today actually trading at a relative discount on valuations measures in 5 years’ time.

At its core, whether you label it value or growth, investing is about buying something for less than what it’s worth. But how should this be measured? The temptations for short-term performance measurement with the technological tools at hand today are substantial. Exact measurement has nothing to do with consistent investment success. Shorter term investing invariably becomes speculation, as it takes time for fundamentals to crystalize. Most research and most investors have a year-end focus. That is a result of human and institutional biases. At best, prevalent investment horizons stretch out 12 to 18 months. Investing with that shorter time horizon and perspective is a crowded and difficult space with only few creating consistent strong relative investment results. It is therefore critical to force yourself out of this trap of potential investment failure.

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