December 6, 2024 • 1hr 6min

TIP680: Investing in Exceptional Businesses for the Long Run w/ Dev Kantesaria

We Study Billionaires - The Investor’s Podcast Network

Dev Kantesaria is the founder and portfolio manager of Valley Forge Capital Management, which has outperformed the S&P 500 by a wide margin since its inception in 2007 and manages over $4 billion in assets. In this episode, Dev discusses his investment philosophy, which is heavily influenced by Warren Buffett and Charlie Munger's approach, while explaining how he applies these principles in today's market environment.

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Key Takeaways

Investment Philosophy: Focus on finding the perfect intersection between growth and predictability in high-quality businesses that can compound value over 10+ year periods
Predictability is Essential: Dev prioritizes predictable businesses over pure growth potential, willing to sacrifice some growth for greater predictability
Pricing Power: The ability to raise prices above inflation rate is a key characteristic of great businesses that can compound value over decades
US Market Focus: Despite higher valuations, the US remains the best market for finding high-quality compounding machines due to its business environment and reporting standards
Temperament Matters: Very few people (perhaps 1 in 5,000-10,000) have the right temperament to be successful long-term investors
Capital Allocation: Prefers companies that require minimal reinvestment and return excess capital through share repurchases rather than acquisitions

Introduction

Dev Kantesaria is the founder and portfolio manager of Valley Forge Capital Management, which has outperformed the S&P 500 by a wide margin since its inception in 2007 and manages over $4 billion in assets. In this episode, Dev discusses his investment philosophy, which is heavily influenced by Warren Buffett and Charlie Munger's approach, while explaining how he applies these principles in today's market environment.

Topics Discussed

Current Market Environment and Investment Opportunities (1:46)

Dev discusses his view on the current market environment and explains why he remains optimistic despite high valuations:

Interest rates have been the main market driver recently, with greater clarity around inflation and rates
Interest rates are still in a historically low range compared to the 1980s when mortgages were 18-20%
The backdrop for equities remains attractive, particularly for companies providing strong organic growth over 5-10 years
Market timing has historically been a poor way to generate returns in US markets

Investment Philosophy and Approach (5:02)

Dev explains how Valley Forge Capital Management adopted Warren Buffett and Charlie Munger's investment approach:

Focuses on finding the perfect intersection between growth and predictability
Seeks companies that can grow at much higher rates than average while maintaining predictability
Aims to build a portfolio that can grow in the high teens to low 20s over the next decade
Takes a 10+ year view when analyzing potential investments

The Importance of Predictability (9:16)

Dev elaborates on why predictability is such an essential part of his investment approach:

Risk Management: "We hate to lose money. It pains me to lose a single dollar."
Willing to sacrifice some growth for greater predictability
Looks for businesses where industry dynamics and business models have been successful over decades
Seeks opportunities through both price drops (1/3 of cases) and market neglect (2/3 of cases)

Views on Big Tech and AI (11:32)

Dev shares his perspective on big tech companies and artificial intelligence:

Acknowledges these are high-quality business models with strong current positions
Concerns about AI becoming commoditized in the future
Uncertain about who will be the winners in AI from both hardware and software perspectives
Expects increasing competition and rising R&D costs as companies fight to stay ahead

Essential Qualities of Great Investors (13:19)

Dev discusses what makes a successful investor:

Emotional Intelligence: Must have the right temperament and personality
Delayed Gratification: Ability to wait decades for investment thesis to play out
Growing up in frugal environments often correlates with successful value investors
Having the right mentor early in career can be crucial

Pricing Power and Business Quality (37:11)

Dev explains why pricing power is crucial for great businesses:

Essential products/services should be able to raise prices above inflation rate
Best protection against inflation is owning companies with strong pricing power
Prefers businesses with minimal reinvestment needs
Pricing power should be sustainable over decades without causing customer defection

US Market Investment Focus (53:30)

Dev explains why he continues to focus on US companies despite higher valuations:

Best business models and compounding machines are predominantly in the US
Benefits from superior reporting standards and audit requirements
Management teams more focused on shareholder value creation
US system generates entrepreneurs who create business models with lasting potential

Capital Allocation and Share Repurchases (56:59)

Dev discusses his views on capital allocation:

Prefers companies that require minimal reinvestment
Share repurchases are the most efficient use of excess capital
Avoids highly acquisitive companies due to integration risks
Prefers companies that hold minimal cash to avoid poor capital allocation decisions

Conclusion

Dev Kantesaria's investment approach demonstrates a disciplined focus on high-quality, predictable businesses that can compound value over long periods. His emphasis on predictability over pure growth potential, combined with a preference for companies with strong pricing power and efficient capital allocation, has led to significant outperformance since Valley Forge Capital Management's inception. Despite higher valuations in US markets, Dev remains committed to investing in US-based companies, believing they offer the best risk-reward proposition for long-term investors.