At Compounding Academy, our mission is to empower investors with a structured, repeatable process for identifying and investing in the world’s best companies. By combining over 50 years of experience in stock-picking and portfolio management, we’ve developed the Mindset SQUARED™ Framework—a step-by-step methodology designed to simplify investing and help you confidently identify and analyse potential companies for the inclusion in patient long-term compounding portfolios, so you can build your wealth impressively over time.
Long term investing – and harnessing the power of compounding—requires a calm and disciplined mindset. We call this the “right mindset.” However, we know that the vagaries of financial markets and their inherent volatilities can create strong emotions of fear and greed in any investor. These emotions, if unchecked, can challenge even the most seasoned investor’s ability to stay focused on long-term goals.
To address this, we’ve developed a highly structured framework designed to reinforce the importance of maintaining a long-term perspective. This framework acts as a mental anchor, helping you navigate the inevitable ups and downs of the market. When emotions run high and the temptation to act impulsively arises, revisiting this mindset framework can help you stay grounded, focused, and committed to this investment strategy. By riding out the storms, you allow compounding to do its work over time—turning patience into lasting financial success.
The Mindset component of our framework emphasizes foundational principles that are essential for achieving long-term success in investing. These principles help investors navigate market volatility and maintain a focus on the metrics that matter most.
So, what does Mindset SQUARED™ mean? While we’ve already explored the importance of Mindset, SQUARED is an actionable framework that ensures every potential company is evaluated using a structured, objective, and repeatable process. Each letter represents a key step in this journey:
This process is specifically designed for analyzing established companies. By following these steps, we focus on identifying businesses with the quality and characteristics necessary to join our group of high-calibre, compounding companies. The goal is to objectively determine whether a company has the potential to consistently generate returns over the long term.
While we’ll give you an overview of the SQUARED process here, each of the seven steps are explored with examples in our newsletter series, “The Resilient Investor” and in greater detail in our Comprehensive Mindset SQUARED™ Course. For a deeper dive into the methodology, including practical examples and actionable insights, visit our newsletter or courses sections (insert links).
The screening process is the foundation of our investment approach. With thousands of publicly traded companies globally, it’s essential to focus only on businesses with the strongest fundamentals. By applying strict criteria—emphasizing high returns on invested capital (ROIC), steady and sustainable growth, and strong balance sheets—we can identify companies with durable business models capable of consistently delivering value to shareholders.
This process reduces the investable universe by approximately 99%, enabling us to concentrate on resilient, high-calibre businesses with compounding potential. Think of it as “fishing in a higher-quality pond,” where every candidate has a significantly greater likelihood of compounding wealth over time.
ROIC is a cornerstone metric for assessing a company’s quality. It measures how efficiently a business generates profits from its capital, whether through reinvestment, acquisitions, or other initiatives. High ROIC demonstrates effective management and the presence of durable competitive advantages.
Key Criteria
Consistently high ROIC reflects a company’s ability to reinvest profits productively and compound shareholder value over the long term. For example, companies like Microsoft and Visa consistently exceed this threshold, demonstrating their ability to outperform peers.
While growth drives stock returns, it must be sustainable, and backed by profitability. Many companies achieve rapid revenue growth but fail to convert it into meaningful profits, eroding their long-term value.
Key Criteria
Sustainable growth ensures resilience in changing markets and a company’s ability to reinvest effectively. For instance, Adobe has consistently delivered both revenue and profitability growth, driven by its subscription model and dominant market position. Stable margins are a strong indication that the company’s market leadership is sustainable.
A company’s financial strength is critical to surviving downturns and seizing growth opportunities. Companies with robust balance sheets avoid excessive risk while ensuring flexibility to invest in their future.
Key Criteria
Strong financial health allows companies to withstand economic uncertainty and capitalize on strategic opportunities. For example, Apple’s consistent cash flow generation and manageable debt levels have enabled it to innovate while rewarding shareholders.
By integrating these metrics—ROIC, growth, and financial health—into a single
framework, we narrow the universe of companies to a select group of high-quality
candidates. Specifically, we screen for:
This approach eliminates lower-quality stocks and highlights companies
with proven durability, strong financials, and sustainable growth. By focusing on these high-calibre businesses, we significantly increase the likelihood of building a portfolio capable of compounding wealth over the long term.
The quality check is a pivotal stage in the Mindset SQUARED™ process. It determines whether a company is worth the time and effort required for a full deep-dive analysis. While the initial screening identifies companies with strong financial metrics, the quality check evaluates their durability and competitive advantages, ensuring they are built for long-term success.
This stage digs deeper to discern whether a company’s historical performance stems from sustainable business strengths or temporary, cyclical factors. Critical questions like “What are the barriers to entry for competitors?” and “Can the company defend its market position?” help uncover its resilience and compounding potential.
To make this evaluation rigorous and objective, we’ve developed a structured framework of 22 critical questions, grouped into five key areas:
The quality check ensures that only businesses with durable competitive advantages move forward. By focusing on these five areas, we assess whether a company is truly built for long-term success or if it’s vulnerable to competition, market shifts, or poor decision-making. This stage saves time and effort by eliminating companies that might initially look strong but don’t meet the high standards required for deeper analysis. In short, this is the step where we ask: Is this company worth taking to the next level?
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We’ve dedicated an entire module in our forthcoming online tutorial course to this step, where we break down each of the 20 questions in detail and provide actionable examples of how to evaluate a company’s quality
Once a company passes the Screen and Quality Check stages, it’s time to ensure we fully understand its business and the industry it operates in. This step involves analyzing the company’s business model, competitive advantages (or “moats”), and the industry that it operates in. A deep understanding of the fundamental drivers of the company is crucial, from its unit economics to the relationships with suppliers, customers, and broader market dynamics. At this stage, the focus shifts to answering critical questions about how the company operates and sustains its success. How does it generate revenue and profits? What makes it resilient in the face of competition or economic changes? By answering these questions, investors can assess whether the company has the building blocks for long-term compounding.
Business Model and Revenue Generation
The foundation of understanding any company lies in its business model—how it makes money and sustains profitability. This includes analyzing its core products or services, customer base, and pricing strategy. For instance, does the company operate a subscription model with recurring revenue, or is it dependent on cyclical industries with more volatile income? Companies with scalable business models, low capital expenditure needs, and high operational efficiency tend to demonstrate better long-term resilience.
Investors must also consider the company’s growth phase. Is it in an expansionary period, capturing market share, or has it matured into a more stable player defending its position? Robust revenue streams, particularly those that are recurring and predictable, indicate a strong foundation for sustainable growth.
A company’s competitive advantage—or moat—is what protects it from competitors and allows it to sustain strong profitability over the long term. Moats come in various forms, including:
Understanding a company’s business and industry is essential for identifying those capable of compounding long-term. Scalable, efficient models and predictable revenue streams build the foundation for growth, while competitive advantages—like brand loyalty or network effects—signal sustained success. This step separates fleeting performers from resilient businesses with potential to compound value for decades.
This is the stage where we roll up our sleeves and dive deeply into the company’s financials, competitive positioning, and the structural growth trends it is exposed to. The goal is to scrutinize key metrics such as margins, cash flow, and management decisions to assess whether the business has the potential to sustain long-term compounding.
By analyzing the company’s historical performance and returns, we gain insight into how resilient it has been in adverse market conditions. Equally important is identifying emerging trends—both positive and negative—that could impact the business going forward. At this stage, the emphasis is on evaluating how durable the company’s market position and competitive advantages (moats) truly are, alongside understanding the structural growth dynamics that could serve as tailwinds for its future performance.
Long-term growth potential is often tied to the broader trends shaping the industry and society. Companies exposed to structural growth trends—such as digitalization, aging demographics, or shifts in regulation—are better positioned to sustain their performance over time. These dynamics create enduring opportunities for growth that are less reliant on short-term market conditions.
A competitive advantage is only valuable if it can endure. Many moats, no matter how strong, can be eroded by technological advances, shifts in consumer behavior, or changes in regulation. Investors must critically evaluate whether the company’s moat can withstand evolving market dynamics and remain a reliable driver of long-term performance.
The Analysis stage ensures you’re not just relying on superficial metrics or past performance. Instead, this step provides a comprehensive understanding of the company’s strengths, vulnerabilities, and potential to thrive over the long term. This is the stage where critical judgement and deep analysis set apart high-quality investments from those that simply appear strong on the surface.
At this stage of the process, it’s easy to fall into the trap of confirmation bias. You’ve spent time digging into the company’s financials, you admire its market positioning, and perhaps you’ve been impressed by its management team, their thoughtful shareholder letters, or their smart capital allocation in recent years. By now, you might feel like this is a company you’d love to own. But this is precisely the moment to stop and challenge your assumptions. It’s time to ask the difficult questions that could derail your investment thesis:
This stage of the process is about finding reasons to walk away, ensuring that your conviction is based on a full, objective understanding of the risks as well as the rewards.
Even the best companies can face existential challenges. Industries evolve, market conditions shift, and technological disruptions can upend even the most established business models. The history of investing is full of cautionary tales, where once-great companies failed to adapt to changing times:
These examples remind us to stay vigilant, even when a company seems dominant and its investment case compelling.
To avoid confirmation bias, investors must critically examine the weak spots in their analysis. Key questions to ask include:
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Revisiting many of the questions from the Business Quality Assessment at this stage helps ensure they still hold water. Digging deeper can uncover new insights or potential red flags, strengthening your investment thesis.
By this stage, we’ve established that we’re dealing with a truly exceptional company—one with durable competitive advantages, a strong financial foundation, and significant growth potential. The final step is to determine what the business is actually worth (intrinsic value).
This involves assessing the company’s intrinsic value to ensure that the current stock price provides a fair entry point for long-term investment.
Valuation is a critical factor in the long-term success of an investment. Even the highest-quality company can deliver subpar returns if bought at the wrong price. Conversely, entering at a fair or undervalued price significantly enhances the potential for outstanding compounding returns over time.
Our task at this stage is to avoid overpaying for future growth, even for a standout business.
To accurately assess intrinsic value, we analyze multiple scenarios:
This approach helps us understand the range of potential outcomes and ensures that our valuation isn’t overly reliant on a single set of assumptions.
We use several valuation tools to determine whether the current price aligns with the company’s intrinsic value. These include:
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To access our DCF Model with step-by-step instructions please look out for our forthcoming Mindset SQUARED™ Course where we dedicate an entire module to simplifying this critical part of the process.
By understanding the intrinsic value across different scenarios, we ensure that we’re entering with realistic expectations and a sufficient margin of safety. A disciplined valuation approach sets the foundation for achieving strong, long-term investment returns.
The decision phase of the framework answers a simple but crucial question:
At what price does it make sense to buy this company?
By this stage, we’ve already determined that the company is of exceptional quality, with the characteristics needed to deliver long-term compounding returns. The focus now shifts entirely to valuation and timing. This step requires using everything we’ve learned throughout the process to decide whether to:
Deciding on an entry point is as much an art as it is a science. While intrinsic value calculations provide a critical reference point, they are ultimately educated estimates based on the fundamentals, risks, and assumptions identified during the SQUARED process. We know these calculations won’t be 100% precise—but they help us to be clear on what our own assumptions are, and ultimately to make informed decisions.
The decision phase is where all the pieces come together. It’s the culmination of the Mindset SQUARED process, requiring judgment, discipline, and patience. By carefully balancing quality and valuation, and by leveraging tools like the V.A.U.L.T., we ensure that every decision aligns with our mission of building a portfolio of compounding businesses capable of delivering exceptional long-term returns.