Pieter Slegers — How to Identify Great Compounders (Compounding Quality)

One-line take: the shortest post in this archive and, unusually, the one that states the arithmetic everything else in it depends on. "Growth Rate = High ROIC × High Reinvestment." The worked comparison is the whole lesson: a 25% ROIC business reinvesting 40% of profits compounds at 10%, while a 10% ROIC business reinvesting 65% — far more capital, far more effort — compounds at only 6.5%. The stated screen is ROIC above 15% plus a high organic reinvestment rate, which is the same threshold used across the written cases. The single stock pitch is Diploma PLC (LSE:DPLM), a roll-up of hundreds of tiny specialist distributors selling components that are "just 0.2% of their total costs" to the customer — which is why 3-5% annual price rises go unnoticed — bought from families at 6-8x earnings with the founders left in charge. The record attached to it: 38,599.7% total return, an 18.9% CAGR over 34 years. Two names appear only as governance context (Lawrence Cunningham sits on the boards of Markel and Constellation Software), and the Munger quote card carries the behavioural half of the argument: "The big money is not in the buying and the selling, but in the waiting."

1. Stocks & names mentioned

One pitched name and two governance references. Diploma is the issue's only argued case; Markel and Constellation Software appear solely because Lawrence Cunningham sits on both boards, so they carry no fresh view here. Research legend: QT Qualtrim · SA Seeking Alpha · STK Stock Analysis. Written post with no timestamps — the At link opens the article.

Ticker	Name	Research	View	What he said	At
DPLM.L	Diploma PLC	STK	Positive	The issue's stock pitch, and a new name in this archive. "Diploma makes money by selling essential, high-margin components for industries like aerospace, medical, and industrial machinery. They grow profits through organic sales and by acquiring small specialist businesses with recurring revenue." The framing is a hidden middleman: "When a Boeing engineer needs a specific bolt for a 787, or a hospital needs a sterile valve for an MRI machine, they call a specialist distributor. Diploma owns hundreds of these niche distributors. Each one is tiny, local, and deeply embedded in its supply chain." The acquisition model is spelled out — "they buy family-run businesses at 6-8x earnings, leave the founders in charge, and give them full autonomy" — and so is the pricing mechanism: "they cross-sell products, consolidate purchasing, and raise prices by 3-5% every year. Customers barely notice because these products account for just 0.2% of their total costs." Result: "an incredible 18.9% annual return over the past 34 years" — the Fiscal.ai chart reads LSE:DPLM +38,599.7% from 2 Jan 1992 to 11 May 2026.	read ↗
MKL	Markel Group	QT · SA · STK · FA	Neutral	Named only as a board seat: Lawrence Cunningham "serves in the board of directors of Markel and Constellation Software." A standing coffee-can name elsewhere in this archive; no new view is offered here.	read ↗
CSU.TO	Constellation Software	QT · SA · STK · FA	Neutral	Also named only through Cunningham's board seat. The largest portfolio holding by modelled upside two days earlier in the portfolio update — here it is context, not a fresh call. Worth noting that the issue's central formula (high ROIC × high organic reinvestment) is not the mechanism Constellation actually uses, which is acquisition-led reinvestment.	read ↗

Note the tension the issue leaves unresolved: the headline equation rewards organic reinvestment at high ROIC, yet the pitched name (Diploma) and the largest holding in the book (Constellation) both compound primarily by acquisition. The archive's usual reconciliation — that a serial acquirer buying at 6-8x earnings is reinvesting at a very high incremental return — is implied rather than stated.

2. Talking points

The equation

"They are very profitable and reinvest most of their profit in organic growth. Growth Rate = High ROIC × High Reinvestment."
The two inputs defined separately: "ROIC: tells you how efficiently a company turns capital into profits. Reinvestment rate: tells you how much of those profits can be reinvested back into growth."

The worked comparison — why effort is not the variable

25% ROIC × 40% reinvestment = 10% growth. 10% ROIC × 65% reinvestment = 6.5% growth.
"Despite reinvesting much more capital, it compounds at only 6.5%. This is the key difference between average businesses and truly exceptional ones."
The stated screen: "companies with a high ROIC (> 15%) that reinvest a lot in organic growth" — the same 15% threshold used in the 15-step Quality Score elsewhere in this archive.

Book tip — Principles

Ray Dalio's Principles, recommended for three things: "How to think independently; Learn from mistakes; Creating systems for better decisions."
A full book summary is published separately on the site.

The quote — where the return actually comes from

"You know how to get rich? But really rich? It's not about a Magic Formula or big secrets. It's all about being patient."
The card: "The big money is not in the buying and the selling, but in the waiting." — Charlie Munger. Placed deliberately between the growth arithmetic and the stock pitch: the equation only pays if the holding period is long enough for it to run.

Lawrence Cunningham

"He's a professor and wrote some amazing books about Warren Buffett. On top of that, he serves in the board of directors of Markel and Constellation Software." A separate interview is linked.

Diploma PLC — the business

"Essential, high-margin components for industries like aerospace, medical, and industrial machinery," grown "through organic sales and by acquiring small specialist businesses with recurring revenue."
"Diploma acts as the middleman nobody talks about… Diploma owns hundreds of these niche distributors. Each one is tiny, local, and deeply embedded in its supply chain."

Diploma PLC — the acquisition and pricing engine

Entry price and autonomy: "They buy family-run businesses at 6-8x earnings, leave the founders in charge, and give them full autonomy."
Value creation afterwards: "they cross-sell products, consolidate purchasing, and raise prices by 3-5% every year."
Why the price rises stick: "Customers barely notice because these products account for just 0.2% of their total costs." The bolt is trivial in the bill and catastrophic if wrong — the classic mission-critical/low-cost-share combination.
The record: 18.9% a year over 34 years; +38,599.7% total return from January 1992 to May 2026 (Fiscal.ai).

3. In plain English

A jargon-free summary of the thesis behind each argued name. (Renders on each name's consolidated page.)

DPLM.L — Diploma PLC Positive

Diploma is a British company that owns hundreds of tiny specialist suppliers. Each one sells a narrow range of parts — a particular bolt for an aircraft, a sterile valve for a hospital scanner, seals and wiring for industrial machinery — to customers who cannot easily buy them anywhere else. On its own each of these businesses is too small to interest anybody; owned together, they become a large, very profitable group.

The money is made in two steps. First, Diploma buys family-run suppliers cheaply — six to eight times their annual profits — and leaves the founder running the business with full independence. Then it does three unglamorous things: sells each company's products through the others' customer lists, buys stock centrally so everything costs less, and raises prices 3-5% a year. That last step is the quiet trick. The parts it sells account for roughly two-tenths of one percent of what the customer spends, so a price rise is not worth arguing about, while getting the wrong part shuts a production line. That is pricing power without a brand.

This is the post's own equation made concrete: a business earning a high return on the money it puts to work, with somewhere sensible to keep putting more of it. The result over more than three decades has been a compound annual return of 18.9% and a total gain of roughly 38,600%. No valuation is given here, so treat it as an introduction to a business rather than a buy signal.

Summary derived from the archived Compounding Quality post (text in transcript.txt) for personal study. Not investment advice. © Compounding Quality / Pieter Slegers for source material.