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🔑 Key Takeaways

  1. Bet with billionaires and invest with people who have a proven track record to save time and money. Joseph Shaposhnik's fund approach, shaped by top mentors, outperformed its benchmark by 3.5% since inception.
  2. Successful investors like Will Danoff have a guiding principle, known as a North Star, that helps them stay focused on long-term investment goals. They remain flexible and willing to change strategies based on proven facts, while investing in good businesses with high-quality management and return on capital.
  3. Successful investing requires knowledge of various strategies and following great investors like Warren Buffet. Investing in high-quality businesses that generate high returns and mentoring from experienced individuals like Bill Gates and Brian Jellison are essential for success in the field.
  4. Develop a North Star for decision-making, focus on defensible niches with less competition, and learn from successful businesses like Buffett to generate consistent cash flow.
  5. To achieve better investment performance, focus on predictable, cash-generating, compounding businesses that can reinvest in projects and improve other businesses while keeping risk under control.
  6. Investing in companies that consistently generate free cash flow and have a track record of reinvesting it wisely, like Microsoft, Starbucks, Meta and Constellation Software, can lead to high returns and long-term growth.
  7. Constellation's focus on fundamentals and conservative approach, inspired by the study of compounders, allows for exceptional management and durability, making it a unique and comfortable long-term holding.
  8. Invest in companies with strong recurring revenue and consistent execution. Analyze free cash flow per share and future compound rate. Consider multiple of free cash flow per share. Constellation and FactSet are attractive investment options.
  9. FactSet's strong focus on subscription recurring revenue makes it an attractive investment opportunity for long-term investors. The company's consistency in revenue growth and earnings, coupled with its durable and predictable business model, positions it for continued growth.
  10. Investing in companies with dominant niches and conservative R&D approaches, like Broadcom, can offer recurring revenue and protection. CEO Hock Tan's principles have consolidated the industry and created significant returns for investors. Stay cautious and selective, but the semiconductor industry still offers attractive investment opportunities.
  11. Wait for data to support investment decisions, focus on companies with diversified revenue streams, and assess the macro environment to avoid deteriorating competitive dynamics. Solid competitive positioning and diversified revenue streams can lead to long-term success.

📝 Podcast Summary

Investing strategies learned from top mentors and successful holdings

Joseph Shaposhnik discusses his investment strategies that he learned from his mentors such as Joel Tillinghast, Will Danoff and Brian Jellison and how he shaped his fund's approach that outperformed its benchmark by 3.5% since inception. He shares his insights on some of the fund's top holdings, including Constellation Software, FactSet, and Broadcom. Joseph brings a type of levelheadedness and consistency you would expect from someone who consistently beat the market for more than a decade. One of his crucial takeaways is betting with billionaires, finding successful people and doubling down on them. This approach is crucial as it saves time and money by investing with people who have a proven track record.

The Importance of a North Star in Investment Strategy

Successful investors like Will Danoff have a North Star, which is the guiding principle for their investment strategy. Will's North Star was earnings per share, and he was always assessing his and the analysts' confidence levels around where earnings per share would be in the next one, three, and five years. If he sensed that the story or the confidence level was changing, he would make a change. Will was flexible and willing to change quickly if proven facts were contrary to his investment thesis. He was always looking for the great winners, especially new issues that could become big over time. Will tended to focus on investing in good businesses that were getting better, with high-quality managements and high return on capital.

Keys to Successful Investing through Multiple Strategies and Mentorship

Successful investing requires the ability to follow a large number of stocks and run multiple strategies to outperform in different market backdrops, as demonstrated by the success of a small cap fund manager focused on low EV to sales businesses. Immersing oneself in the teachings of great investors like Warren Buffet is key, with one important lesson being to invest in high-quality businesses that generate high returns and great free cash flow, even if it means paying a premium for those businesses. Joseph Shaposhnik was fortunate to have had mentors like Bill Gates and Brian Jellison, who generously shared their knowledge and helped shape his investing journey.

Lessons from Brian's Successful Transformation of Roper Industries

Brian presided over the transformation of Roper Industries into a business of dozens of niche companies that generate consistent cash flow. His North Star was cash return on investment and he focused on developing a defensible niche. He also adopted a decentralized model, which he studied from Buffett and others, to manage 35-40 businesses. What we can learn from him is that it's essential to think differently and develop a North Star, as it drove all his decision-making. Niche businesses attract less competition and are more defensible, leading to higher free cash flow. It's vital to study successful businesses like Buffett and others, learning from them to add onto businesses and platforms. Focus instead on defensible niches.

The Importance of Predictability, Free Cash Flow, and Compounding Businesses in Investing

When making investments, predictability is as important as starting valuation. Limiting turnovers can also help in achieving better performance. Cheap businesses that generate low returns on capital may not be long-term winners. Instead, it's better to focus on great compounding businesses that are likely to get better over time. Free cash flow is very important and physically moves stock prices, allowing companies to reinvest in projects, buy back shares and improve other businesses. The key is to find businesses that can compound free cash flow per share at the highest rate with risk under control.

The Importance of Investing in Free Cash Flow Generating Businesses

Investing in businesses that generate free cash flow and have a track record of great reinvestment of their free cash flow is crucial. Great businesses like Microsoft, Starbucks, or Meta can go up many folds and it is not too late to invest even if the stock has doubled or tripled. Great CEOs like Bill Gates and Jeff Bezos hold onto these great businesses for long periods of time. Constellation Software is a great example of a predictable growth business that generates consistent free cash flow with a decentralized business model and diversified revenue streams. Its defensiveness and high returns on capital make it an ideal investment with great potential for reinvestment of its cash flow.

Constellation's Decentralized Business Model for Efficient Acquisitions and High Returns

Constellation is a decentralized business that empowers employees to make investment decisions, leading to efficient small acquisitions and high returns on capital. The company also boasts insider ownership and incentivizes management to invest in the business. The focus on the fundamentals and avoiding promotional behavior are key to the exceptional management record of Constellation. The founder has studied the great compounders and built a business that embodies their lessons while keeping a conservative approach. This has given Constellation an advantage over software-focused private equity firms in the US domicile private equity firms. The exceptional model and team provide great downside protection and durability, making Constellation a comfortable and unusual long-term holding for the fund.

Constellation and FactSet - Strong Performing Companies with Investment Potential

Constellation is a strong performing company, with a relatively cheap price to earnings ratio coupled with a high free cash flow yield. Its revenue is mostly recurring and its consistent execution made it resilient during the pandemic and bounced back quickly. Investors should focus on the free cash flow per share and its future compound rate while also considering the multiple of free cash flow per share. Although the current valuation is not low, it is still relatively attractive compared to other options in the market. FactSet is a similar company that has the potential to grow like Constellation and is worth considering for investment.

FactSet: A Durable and Predictable Business Model for Long-Term Investors.

FactSet is a leading provider of financial and economic data to financial professionals worldwide, with over 180,000 global users and 95% of revenues generated through subscriptions. The company's consistency in revenue growth and earnings made it an attractive investment opportunity for long-term investors. FactSet's strong focus on subscription recurring revenue, which is more durable and predictable, is favored over transactional recurring revenue. The new CFO, Linda Huber, is expected to improve cost control and capital allocation decision-making to continue to position the company for growth. Unlike some tech companies, FactSet was not particularly impacted by the pandemic, so there may not be much of an impact from its customer base or staff reduction. FactSet is an attractive business with a durable and predictable business model that fits the investment approach of long-term investors.

Investing in Semiconductors: Challenges and Opportunities

Investing in semiconductors can be challenging due to rapid product cycles and technological changes, but investing in companies with dominant niches and conservative approaches to R&D can provide recurring revenue and protection. Broadcom stands out as a top semiconductor business to invest in today due to their strong market presence in unattractive areas, careful capital allocation, and successful pivots to software. Hock Tan is an exceptional CEO and investor who has consolidated the industry and created significant returns for investors by applying his principles to both semi and software businesses. It's important to stay cautious and selective when investing in semis, but the industry still offers attractive investment opportunities.

The Importance of Assessing Competitive Positioning Before Investing.

When assessing a company for investment, it's important to carefully evaluate the competitive position before making a decision. Precision Castparts, which Berkshire purchased, was losing market share to competitors, highly reliant on a few customers, and operating in a difficult and competitive space. The key lesson is to wait for the data to go in your direction before investing, and to look for companies with diversified revenue streams. It's also essential to assess the macro environment and avoid situations where competitive dynamics are deteriorating. Investing in a company with solid competitive positioning and a diversified revenue stream can help ensure long-term success.