By Compounding Academy
In this issue, we continue our Mindset SQUARED™ framework series, the structured process we use to identify, analyse, and invest in high-quality compounding businesses.
Today, we move to one of the most important and often misunderstood steps in the process: Evaluate.
This is where we determine what a business is actually worth, assess what expectations are embedded in the share price, and ensure we are not overpaying for future growth.
Why price discipline is the difference between owning great companies and earning great returns
Most investors think the hard work is finding a great business. The best investors know the outcome is largely determined by the price paid.
Even exceptional companies can deliver poor returns if the entry price assumes too much future success. This issue explains how valuation frames expectations and why understanding intrinsic value is essential for long-term compounding
By this stage, we already understand the business. We know how it makes money, why customers stay, and what gives it durability.
The remaining question is simple:
Does today’s price leave room for attractive long-term returns and a margin of safety?
Valuation is not about precision, but rather expectations. When expectations are high, returns rely on further optimism. When expectations are restrained, returns are driven by business fundamentals.
Successful investors do not anchor on a single valuation outcome. They think in ranges.
Intrinsic value is assessed using three lenses:
Translating future free cash flows into today’s value. This forces clarity on what truly drives returns.
Forward P/E ratios and free cash flow yields viewed against history, peers, and the broader market.
Base, bear, and bull cases to understand what is priced in and what could go wrong.
The goal is not to predict the future, but instead to understand what the current price already assumes.
Let’s consider Accenture.
Accenture remains a high-quality global franchise with strong client relationships and durable cash generation. The valuation de-rating shown below reflects two concerns. A slower enterprise spending cycle, and a more structural question around AI.
As companies explore building AI solutions in-house, investors are questioning whether some labour-intensive consulting work could be displaced. This debate goes directly to Accenture’s operating model.
What matters from a valuation perspective is that these concerns are now reflected in the price. Valuation has compressed toward historical norms and the premium to the market has narrowed. Expectations are lower, even though the business has not fundamentally changed.
This is often where opportunity begins. Not because uncertainty disappears, but because it is priced in.
The chart below shows how market perception of Accenture has changed over time. At periods of maximum optimism, valuation expanded and expectations were high. More recently, valuation has compressed, both in absolute terms and relative to the market, as concerns around enterprise spending and AI disruption have been priced in. The business may not have changed dramatically, but expectations clearly have. This shift is what valuation discipline is designed to capture.
Now contrast that with Palantir Technologies.
Palantir is not a speculative story. The opportunity is real and increasingly visible.
Its platforms sit at the intersection of data integration, operational decision-making, and AI deployment. This is not consumer-facing AI. It is software embedded deep inside government agencies and large enterprises, where switching costs are high and implementation risk is non-trivial. As organizations move from experimenting with AI to deploying it at scale, Palantir’s ability to integrate disparate data sets and operational workflows gives it a genuine edge.
The company is also showing improved operating discipline. Margins are expanding, free cash flow is material, and revenue growth is becoming more balanced between government and commercial customers. These are all positives.
The issue is not the business. It is the starting price.
Valuation implies that Palantir will sustain strong growth, expand margins materially, and defend its competitive position without interruption. Both absolute and relative valuation multiples sit well above long-term norms. In this setup, solid execution is already assumed. To deliver strong shareholder returns from here, the company needs to exceed those expectations.
This is the distinction valuation forces you to confront. A real opportunity can still be a poor investment if the price leaves no margin for error.
What to notice: valuation remains well above long-term norms and carries a large premium to the market, reflecting high embedded expectations.
Valuation charts are not timing tools. They are expectation maps.
Two perspectives matter:
What to look for:
What requires caution:
Valuation tells you whether the odds are in your favour before you invest.
If you want one habit that materially improves outcomes, make it this:
If acceptable returns still exist under conservative assumptions, the setup is robust. If everything needs to go right, valuation risk is high.
This is how the most successful investors protect capital and allow compounding to do the heavy lifting over time.
We will go deeper into valuation in future issues, including how expectations, scenarios, and entry discipline shape long-term outcomes.
We also share our latest thinking on valuations with paid subscribers, particularly where sentiment and fundamentals diverge. More detail shortly.
In the next issue, we reach the final step of Mindset SQUARED™: Decide, where discipline matters most and we choose whether to act or to park a stock and wait.