In recent notes, I’ve given you examples of world-leading businesses like Nike and Louis Vuitton Moet Hennessy that have defied any perception of macroeconomic headwinds. We have also seen the WAAAX index -27% since the September peak, and I remain cautious on highly valued profitless companies yet bullish and invested in what we consider undervalued, highly profitable companies that will compound over time. I still believe equity markets globally are becoming more discerning, behaving more like a “weighing machine”, than a “voting machine”. In my view, you’ll be better served being invested in companies with ultra-high barriers to entry, high returns on invested capital, profitable and strong free cash flow generative companies, rather than those the market “hopes” will generate those attributes in the future and will require more funding from investors (remember WeWork, $47 billion to $8 billion “valuation” in a month).
Microsoft (MSFT), the largest company in the world, exhibits all the highly attractive investment attributes mentioned above. MSFT is a large holding in the AIM Global High Conviction Fund, we don’t own it because it’s the biggest; we own it because it’s the best risk-adjusted investment we can find.
We look for companies that have the long-term ability to generate excess returns on capital and reinvest that capital at rates of growth greater than inflation. These are what we call compounders. MSFT is a classic example of a compounder.