By Compounding Academy
In this issue, we continue our Mindset SQUARED™ framework series, the structured process we use to identify, analyze, and invest in high-quality compounding businesses.
Today, we move to one of the most important and most uncomfortable steps in the process: Rip Apart.
This is where we deliberately try to break the investment case, and look for reasons not to invest.
Most investment mistakes don’t come from lack of intelligence or effort.They come from falling in love with a good story.
By the time you’ve screened a company, assessed its quality, understood the business, and analysed the numbers, it’s very easy to start defending your own work.
That’s when risk creeps in, not because you’ve missed something obvious, but because you stop asking the uncomfortable questions.
This is why professional investors deliberately pause and rip the investment case apart before committing capital.
The Rip Apart stage is not about pessimism. It’s about intellectual honesty.
Even exceptional businesses face threats:
History is full of companies that looked high-quality right up until they weren’t.
If your thesis only works when everything goes right, it isn’t robust enough for long-term compounding.
As Investment Professionals we don’t ask whether a company is good. We ask what would have to change for it to stop being good.
This forces you to examine the business from the outside in:
If you struggle to articulate how the business might be disrupted, that’s a warning sign, not a comfort.
Recent trends often look reassuring and attract attention to a stock, but they are rarely the full story.
At this stage, you should be clear which key performance indicators truly matter for the business. The starting point is to examine trends in those KPIs and ask whether they are behaving as expected. From there, you look across the broader set of metrics to see if anything underneath contradicts the headline picture.
We saw this clearly with Labcorp in the last Newsletter. Revenue growth appeared resilient and, on the surface, the business looked stable. But when we interrogated the KPIs more closely, margins were trending down. The headline trend attracted interest, yet the underlying economics were deteriorating, signalling pressure on the business model.
The aim is not to analyze everything in equal depth, but to identify anomalies, inconsistencies, or early signs of stress that suggest the economics may be changing, even if reported results still look fine.
Good outcomes can hide bad decision making, for a while.
Ask:
In many failures, the numbers didn’t collapse first, judgment did.
Before you invest, write down:
This is not about predicting the future.
It’s about defining your line of intellectual honesty before emotions get involved.
Anyone can identify a good business in hindsight.
Very few investors consistently avoid the slow deterioration and/ or mission creep that destroys compounding.
The Rip Apart step exists to protect you from:
It’s the discipline that keeps high quality portfolios high quality.
Pick one holding in your portfolio this week and deliberately try to disprove your own thesis. If that feels uncomfortable, you’re doing it correctly.
Start by identifying the two or three KPIs that truly matter for the business. These will be the metrics that drive long-term value creation, not the ones that simply look good in a single year.
Then:
If you find yourself explaining away weaknesses rather than confronting them, that’s a signal worth paying attention to.
For a structured walkthrough of how we apply this discipline, revisit the Rip Apart section of the Mindset SQUARED™ mini-course and run the checklist alongside it.
In the next issue, we move to Evaluation, where we step back and ask a simple but critical question: what is this business actually worth?
This is where we translate everything we’ve learned so far, business quality, competitive positioning, key assumptions, and risks, into a view on intrinsic value and expected returns.
See you next time.