How Chuck Akre Find Compounding Machines

Chuck Akre, who retired in 2020, is one of the best-quality investors in the world. His insights can be useful for all quality investors. Chuck founded Akre Capital Management in 1989. Today, his firm has approximately $16 billion in assets under management (AUM). In this article, InvestRadarHQ will show you how you can invest in compounding machines.

Let’s start with a story. In 1626, Native Americans sold the island of Manhattan for an estimated $20 worth of beads and trinkets. Could you guess how much this $20 would be worth if these Native Americans invested it at a rate of return of 9% per year and stuck with this investment programme for the following 380 years? The correct answer is more than $3.335.000.000.000.000! It’s the same principle as when you double a penny every day for a month; eventually, this penny would be worth more than $10 million. This beautifully shows that you don’t need an extraordinary return to achieve extraordinary results. The only thing that is crucial is having the ability to sustain an investment programme uninterrupted over a very long period of time. Compounding can truly be beautiful.

Now let’s get back to Chuck Akre and compounding machines. Akre’s investment philosophy can be summarised as follows:

“We focus our capital in a select number of what we believe to be extraordinary businesses. These companies meet specific standards related to the business itself, the people who manage it, and the discipline they demonstrate when it comes to reinvesting free cash flow.”

Chuck refers to this investment approach as “The Three-Legged Stool”. As an investor, you should buy great businesses with good management that can reinvest a lot of their free cash flow in future growth. When you can find these companies, you have discovered a (potential) compounding machine. These are the companies you are looking for as an investor.

First and foremost, you want to invest in great businesses. You want to invest in great companies with a strong competitive advantage. When a company has a high and predictable ROE and FCF, pricing power, and a strong balance sheet, this is already an indication that you are looking at a great company.

When you have found a great business, you should look at the integrity of its management. Do they have skin in the game? Are the interests of you as a shareholder and the management aligned? You want to invest in companies where management focuses on long-term value creation.

“Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have in their portfolio.”

– Nassim Taleb

So, now you have found a great business with integer management. Finally, secular trends are very important for quality investors. You want to invest in companies that can reinvest a lot of their free cash flow to achieve future growth. These kinds of companies can grow their free cash flow per share exponentially. Look at See’s Candies for example. Warren Buffett bought See’s Candies in 1972 for $25 million. Today, See’s Candies has generated more than $2 billion (!) for Berkshire Hathaway.

The ROIIC or Return on Incremental Invested Capital, is a great metric to look at when looking at reinvestment opportunities. You can calculate the ROIIC by dividing the change in net operating profit (NOPAT) in the current period by the change in invested capital in the previous period.

When you find a great business with excellent management and plenty of reinvestment opportunities, you have found a (potential) compounding machine. These companies are quite rare, as only a few companies in the whole world meet all 3 criteria.

If you can buy compounding machines at a fair price, you will end up with great investment results.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

– Warren Buffett

When we look at the results of Chuck Akre, we conclude that, as of today, the Akre Focus Fund has managed to grow by 421% since 2009, compared to 275% for the S&P 500. Chuck Akre’s fund has grown at a CAGR of almost 15% since 2009. When you would have invested $1.000 at the launch of the fund, your investment would be worth $5.214 today:

Mastercard, Moody’s, American Tower, Visa, and Constellation Software are the five biggest positions today in the Akre Focus Fund. American Tower has been in Chuck’s portfolio since the launch of the fund in 2009, meaning that Chuck made a ten-bagger on this stock.

Chuck Akre is a great investor who we can learn a lot from. All positions of the Akre Focus Fund and some fundamental characteristics can be found here:

Do you want to learn more about Chuck Akre? His Google Investment Talk, “Trying To Solve The Investment Puzzle” is very insightful:

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About The Author

Hey, I'm John, a self-confessed finance enthusiast with a clear goal. My life revolves around numbers, market trends, and economic theories. This website is where I break down intricate financial ideas, explore investment strategies, and share my passion for all things finance. Join me on this journey to unravel the intricacies of the financial world.