THE RESILIENT INVESTOR

By Compounding Academy

Strong growth can make any company look impressive for a while. But true compounders share deeper qualities that allow them to grow steadily, withstand competition, and deliver consistent long-term returns.

Today’s issue focuses on the Quality Check stage of Mindset SQUARED. This is where we determine whether a company deserves a full deep dive or should be ruled out early. You will learn how to assess durability, competitive strength, and resilience using the five compounding pillars.

The Five Pillars of Lasting Quality

Below are the core dimensions of the Quality Check and the same pillars behind our scoring system. To bring them to life, we will use Intuitive Surgical as an example, drawing from Compounding Academy’s completed Business Quality Assessment. (BQA).

1. Visibility:

A true compounder should have predictable, repeatable revenue. Without this, future cash flows become guesswork.

What to look for:

  • High contribution from recurring revenue
  • Clear, stable revenue drivers
  • Industry tailwinds that persist for years
  • A customer base that expands naturally over time

Example: Intuitive Surgical

Intuitive clears the visibility bar with ease:

  • More than 80 percent of revenue is recurring, driven by instruments, accessories, and service contracts rather than one off machine sales
  • The installed base of robots creates a locked in usage cycle where every procedure generates ongoing revenue
  • Robotic surgery is still significantly underpenetrated which means growth is supported by structural adoption tailwinds

Why it matters:

High visibility makes earnings smoother, protects against economic cycles, and reduces the number of things that can go wrong. Compounders thrive in environments with few surprises.

2. Competitive Strengths:

Businesses without true competitive advantages eventually face margin pressure and slowing growth.

What to look for:

  • Market leadership (#1 or #2 player)
  • Switching costs and ecosystem strength
  • Brand and customer loyalty
  • Margin stability

Example: Intuitive Surgical

Intuitive’s competitive position is exceptional:

  • Nearly full share of robotic soft tissue surgery
  • A two decade lead has created a robust ecosystem of hardware, software, instruments, training, and service
  • Hospitals and surgeons demonstrate extremely high loyalty through repeat usage and system upgrades

Why it matters:

Competitive strength determines whether a company can defend its economics. A weak moat can collapse quickly once rivals catch up.

3. Management Effectiveness:

Long-term success depends on management making consistent, disciplined decisions.

What to look for:

  • Steady growth in revenue and earnings
  • Consistent execution. Management does what it says it will.
  • Clear investment strategy
  • Incentives aligned with long-term value creation
  • Sensible capital deployment

Example: Intuitive Surgical

Management quality is a key part of the company’s story:

  • Revenue has compounded at 15 percent annually over 15 years
  • R&D spending has grown faster than sales to maintain technological leadership
  • Acquisitions are strategic, with most growth coming organically
  • Long-term stock based incentives reinforce alignment with shareholders

Why it matters:

Poor management can destroy value quickly, even in a strong business. Great management compounds value in quiet, consistent ways.

4. Financial Strengths:

Strong finances give companies the flexibility to invest, innovate, and withstand tough environments.

What to look for:

  • Net cash positions
  • Sustainable free cash flow
  • High and stable ROIC
  • Disciplined capital intensity

Example: Intuitive Surgical

  • More than 5.2 billion dollars of net cash
  • ROIC averaging 17 percent for 15 years
  • Free cash flow conversion historically above 100 percent, with recent dips driven by increased investment
  • Low financial risk, giving the business resilience and strategic freedom

Why it matters:

Financial strength separates businesses that can invest through downturns from those forced to retrench. This can create long-term advantages.

5. Resilience:

Resilience is a company’s ability to cope with competitive, regulatory, and technological change.

What to look for:

  • Diversified growth drivers
  • Stable regulatory position
  • Technological innovation
  • Practical ESG approach – not box ticking

Example: Intuitive Surgical

  • Strong regulatory approvals and clinical adoption
  • A board with deep expertise in technology, AI, and medicine
  • ESG alignment that strengthens relationships with hospitals and health systems

Why it matters:

Resilience allows a company to sustain compounding through shocks rather than seeing earnings or market share meaningfully damaged.

 

Where Quality Checking Reveals Hidden Weaknesses

This stage helps investors avoid companies that look appealing on the surface but fail under deeper scrutiny.

Here are examples of red flags the checklist exposes:

1. High Growth Software With Weak Moats

Growth can be strong, but if switching costs are low and customers can migrate easily, competitive pressure accelerates and margins shrink.

2. Trend Driven Consumer Brands

Brands that grow quickly online often lack repeat purchasing power or pricing strength. Once momentum fades, revenue drops sharply.

 3. Capital Intensive Businesses in Disguise

Industrial companies often appear cheap using traditional valuation measures, yet require heavy reinvestment that prevents compounding.

4. Hardware Led Models Without Service Ecosystems

Businesses dependent on one off hardware sales face volatile revenue and limited durability. Without recurring revenue layers, predictability is weak.

 

How to Apply This to Your Portfolio

A simple three step exercise can add immediate discipline:

  1. Choose three stocks you own or follow
  2. Ask the key question: Is this business built to compound for at least ten years?
  3. Compare to a benchmark compounder such as Intuitive Surgical, and use its characteristics as a reference point for long-term quality

 

Let Us Help You

If you want to go deeper, explore our free Mindset SQUARED™ mini-course and browse the 50+ pre-screened one-pagers, a simple way to build your knowledge and strengthen your investment process.

You can also explore our growing library of completed Business Quality Assessments, where we have already done the heavy lifting by evaluating companies across all five compounding pillars.