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The Marshmallow Test

We investigated some thoughts on intangible assets and invested capital in our last letter and subsequently we have been discussing the reinvestment rate and long-term growth of some of our investments. Reinvestment rate is one of the most important yet often hidden contributors to long-term compounding. Last quarter we gave a purely mathematical example of how a 25% return on capital business that fully reinvests for five years will return over 200% on the initial capital invested. The catch is to delay taking a dividend today and patiently reinvest all the cash back into the business without diluting the ROIC. Many companies have tried and failed here. Our colleague, Eric Gordon, reminded us recently of The Marshmallow Test¹: would you (or a young child in the experiment) have the self-control to refrain from eating a marshmallow that is placed right in front of you for up to 20 minutes in order to get two? Subsequent research, much of it led by psychologist, Walter Mischel, who invented the test, demonstrates that we can train our willpower as an acquirable cognitive skill, it is not prewired. Importantly his original point of self-control being crucial for successful pursuit of long-term rewards still stands and delayed gratification is the ultimate point of long-term investing.

Before we delve into this topic we have been asked with increasing regularity about the inflation genie which seems to be well out of the bottle; to us this is all about pricing power. We wrote in our 1Q19 investment letter about The Pricing Power Tightrope (link) including our view on the thorny issue of ethics. One core tenet we hold that we seek in our investee companies is the “win-win”, where the customer gets great value and ultimately as shareholders we benefit from this. We want happy customers who come back for a long time. In microeconomic terms our companies create a consumer surplus. How the surplus gets shared between creator and customer is critical to long-term value creation for both.

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The Global Leaders Strategy invests in a concentrated portfolio of market-leading companies from across the globe. We believe that companies that combine exceptional outcomes for their customers with strong leadership can generate high and sustainable returns on invested capital (ROIC) which can lead to outstanding shareholder returns.


Past performance is not a guarantee of future performance and you may not get back the amount invested.
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