Compounding through first principles.

Moat

A durable advantage that keeps competitors out, so high returns on capital last for years instead of being competed away.

• Returns on capital above the cost of capital, through a full cycle
• A clear source: brand, network effects, switching costs, scale or regulation
• Market share that holds or grows when rivals cut prices

Management

Honest, capable people who think like owners. Over a decade, what management does with the cash matters as much as the business itself.

• Meaningful insider ownership, and pay tied to per-share value
• Reinvestment, buybacks and acquisitions that earned their keep
• Candid letters that own mistakes, not just adjusted numbers

Margin

The power to raise prices without losing customers. Wide, steady margins are the visible sign of a moat at work.

• Gross and operating margins that are high and stable, not peak-cycle
• Price increases that stick through inflation and downturns
• Earnings that turn into free cash flow

Momentum

A long runway to reinvest at high returns. Compounding needs a high rate and a long time; the runway supplies the time.

• A large or growing market, and still a small share of it
• New capital earning returns as good as the old
• Growth funded from cash flow, not dilution or debt