Chuck Akre’s 3-Legged Stool

Strategy to Pick Compounding Machines

August 17, 2024

Investing doesn’t have to be complex to be effective.

You just need to understand the key attributes that make a company a compounding machine.

Picking compounding machines are required for anyone who wants to grow their wealth steadily,

without constantly watching the market or using overly complex strategies.

In this newsletter, you’ll discover Chuck Akre’s "Three-Legged Stool" approach to investing

A simple method focused on long-term value creation.

The biggest mistake investors make is not having clear criteria for picking stocks.

They get lost in technical analysis, try to time the market, or chase “hot” stocks.

This turns investing into gambling instead of building real financial security.

Don’t make the same mistake.

Think of any stock you pick as something you’ll hold for at least 10 years.

To do that, you need to choose companies with strong fundamentals.

The Three-Legged Stool framework can help you find these high-quality businesses.

Focus on companies with strong, lasting business models.

Businesses that can generate high returns on equity year after year.

They typically have a strong competitive edge, or "moat"

This moat could come from brand strength, proprietary technology, cost advantages, or network effects.

Whatever the source, the moat acts as a protective barrier,

helping the company stay dominant in its market.

Look for companies with management teams that are honest, skilled, and prioritize shareholders.

These leaders need more than just good intentions,

They must have a proven track record of making smart choices with company resources.

Great leaders know how to allocate capital wisely,

Investing in growth areas while avoiding wasteful spending.

They should also have a clear, long-term strategy to keep the company strong and growing over time.

Focus on businesses with plenty of room to reinvest their earnings— and do so at high rates of return.

This reinvestment should come from within the company, not from relying on outside funding or constant acquisitions.

Why does this matter?

Because companies that can compound their earnings internally, year after year,

have a much better chance of generating big returns over time.

It’s not just about making money today

it’s about ensuring consistent, steady growth well into the future.

In short, businesses that have both the room and the ability to reinvest wisely,

are the ones that deliver exceptional returns and create lasting value for shareholders.