THE RESILIENT INVESTOR

By Compounding Academy

In this issue, we move to Step 3 of our Mindset SQUARED™ Framework – Understand. Once a company has passed your initial screens and quality checks, the real work begins: learning how the business actually works.

Understand: How to Analyze a Business Like a Professional

When you truly understand a company, you are far less likely to be shaken out by headlines or short-term market swings. You know what drives results, what keeps the business resilient, and when a price drop is an opportunity rather than a warning sign.

This stage is about answering a few simple but powerful questions:

  • What industry is the company in, and how does that industry behave over time?
  • How does the company generate revenue and profits?
  • Why is it difficult for competitors to displace it?
  • What protects those advantages over the long run?

Get these answers right and you build the conviction to hold great businesses through volatility instead of reacting emotionally.

1. Start With the Industry

Professional analysts always zoom out first. A great business in a shrinking or heavily regulated industry will face headwinds, no matter how strong its products look in isolation.

Key questions:

  • Is the industry cyclical or steady?
  • Are there long-term tailwinds such as digitisation, demographics, or regulation?
  • How concentrated is market share – a few dominant players or many small ones?
  • Who holds the real power? – suppliers, customers, regulators, platforms

Understanding the industry context tells you whether the company is swimming with or against the tide.

2. Understand How the Company Makes Money (Business Model & Unit Economics)

Next, ask the foundational question: how does this company actually make money?

What to look for:

  • Revenue model – recurring subscriptions versus one-off transactions
  • Products and services – what is being sold, and to whom
  • Customer base – number of customers, concentration, churn, and growth
  • Pricing power – can the company raise prices without losing business
  • Unit economics – gross profit per unit, contribution margins, retention, payback periods

Companies with scalable models, recurring revenue, and strong unit economics generally have a far better chance of compounding over long periods.

A simple test: if you cannot explain in two or three sentences how the company makes money, you do not understand it well enough to invest yet.

3. Identify Why It’s Hard to Compete (Durable Competitive Advantages)

Once you understand the business model, ask why this company should keep winning. Professional investors call these advantages “moats” – the structural features that protect profits from competition.

Common moats include:

  • Brand loyalty
  • Technological edge
  • Switching costs
  • Cost advantage
  • Network effects
  • IP and Patents
  • Regulatory Barriers

Case study examples

Watsco – North America’s largest HVAC distributor. Its scale, supplier relationships, and deep integration with contractors create powerful sticky advantages.

Free Video Teach-In: https://compoundingacademy.com/watsco-teach-in

Experian – A global leader in credit data and analytics. Experian benefits from network effects, regulatory barriers, and long-term contracts that embed its data deeply in customer workflows.

Free Video Teach-In: https://compoundingacademy.com/experian-teach-in

The stronger and more varied the moats, the more confidence you can have that profits will remain resilient even as the industry evolves.

4. Understand What Protects the Business Over Time (Long-Term Resilience)

Finally, step back and ask: what ensures this company can sustain its advantages for years to come?

This is where you evaluate durability:

  • Are switching costs increasing or eroding
  • Is the customer relationship getting stronger
  • Are regulatory or technological shifts helping or hurting
  • Does the business stay resilient through cycles

If the business can withstand pressure from competition, disruption, or macro cycles, then it has the foundations for long-term compounding.

Make It Practical

1. Create a One-Page Summary of the Business

Write a single page that answers four simple questions:

  • Industry: What market is it in, and is that market attractive?
  • Business Model: How does it make money?
  • Moat: Why is it hard for competitors to take share?
  • Resilience: What protects profits over time?

If you can’t fill this page clearly, you don’t understand the company well enough yet.

2. Use an “Understanding Checklist” Before Buying or Adding to a Position

Before increasing a holding, ask yourself:

  • Has anything important changed in the industry?
  • Has anything changed in how the company makes money?
  • Are the moats getting stronger, stable, or weaker?
  • Is the company’s resilience improving or declining?

If you can’t answer these confidently, pause and revisit your understanding.

3. Test Three Companies You Already Own

Pick three holdings and explain, in writing, how they:

  • Operate within their industry
  • Make money
  • Maintain their moat
  • Stay resilient over time

If any explanation feels vague, shallow, or uncertain, review that position.

 

Let Us Help You

If you would like to see what this looks like in practice, explore:

Pick one company you own, run it through the Understanding Stack, and compare your notes with how we approach similar businesses. Over time, this habit will sharpen your judgment, deepen your conviction, and help you hold truly outstanding companies for long enough to let compounding do its work.