Dev Kantesaria: Great Compounding Machines That Crush The Market (Plus, New Stocks He Has Bought)

Episode Overview

• An exploration of super-investor Dev Kantesaria's unique journey from Harvard Medical School and venture capital to managing the highly concentrated, $5 billion Valley Forge Capital fund.
• A deep dive into Kantesaria's Buffett-Munger-inspired investment philosophy, which focuses on identifying high-quality, capital-light businesses with durable moats and significant pricing power.
• Detailed case studies on two of his most successful investments, FICO and S&P Global, revealing his strategy of buying great companies during periods of market neglect or misunderstanding.
• A summary of his core principles, including the importance of being a "business historian," the power of inaction, and his skepticism about the long-term monetization of AI.

Key Concepts

• Unique Investor Background: Kantesaria's path to public market investing was unconventional, with a background in medicine (Harvard MD) and two decades in venture capital, providing him with deep operational business experience.
• Investment Philosophy: A focus on business quality, influenced by Buffett and Munger. The strategy involves buying capital-light compounders with durable competitive advantages, predictable growth, and immense pricing power for the long term.
• Sources of Opportunity: Buying opportunities primarily arise from two scenarios: significant market misunderstanding about a company's prospects or, more commonly, "market neglect," where high-quality but "boring" businesses are overlooked by investors.
• Portfolio Construction: Kantesaria runs a highly concentrated portfolio, allowing his best ideas and top-performing stocks to grow into very large positions, demonstrating high conviction.
• Case Study - FICO: An example of a capital-light business with network effects, high switching costs, and significant "untapped pricing power" that Kantesaria identified before the company began a cycle of major price increases.
• Case Study - S&P Global: A contrarian investment made during the 2008 financial crisis. Kantesaria looked past the regulatory noise to identify the durable duopoly S&P shares with Moody's and the inelastic demand for its credit rating services.
• Skepticism on AI: Kantesaria holds the view that AI is likely to become commoditized, making it difficult for most companies to build a durable competitive advantage and effectively monetize their AI offerings over the long term.

Quotes

• At 2:11 - "I realized in my third year of medical school that although I loved the intellectual aspects of medicine, practicing medicine wasn't something I could see myself doing for the next 30 or 40 years." - Kantesaria explains his decision to pivot away from a career as a surgeon.
• At 6:33 - "I've studied a lot of playbooks over the years, starting at age eight, and the one that resonated with me the strongest was the Buffett-Munger playbook, which is to focus on business quality." - Kantesaria shares the foundation of his investment philosophy.
• At 14:13 - "Two-thirds of the time, surprisingly, the opportunities we find are what I call market neglect." - Kantesaria outlines the most common scenario that creates buying opportunities for his fund.
• At 25:26 - "If you say we want wide-moat pricing power plus capital-light, that actually has a very small Venn diagram overlap." - The speaker explains that finding companies with both strong competitive advantages and low capital requirements is rare and a key part of Kantesaria's successful strategy.
• At 29:34 - "Selling an additional FICO score comes with 95% incremental margins and zero capital requirements." - This quote illustrates the incredible operating leverage and capital-light nature of FICO's business model.
• At 32:30 - "[FICO] had not raised prices for 25 years prior to 2016... It's a lesson in untapped pricing power." - The speaker identifies the crucial catalyst that Kantesaria likely saw, where a dominant business had years of pricing potential ready to be unlocked.
• At 40:27 - "Beyond the noise, these companies had among the best business models in the world: rating debt... Effectively, there is no way to undercut Moody's or S&P on price." - The speaker explains Kantesaria's thesis for buying S&P Global during the financial crisis, focusing on the durable, price-inelastic nature of the credit rating duopoly.
• At 53:01 - "Pricing power is the hallmark of a great business. If you can raise your prices above the rate of inflation consistently, you have a phenomenal business model." - Kantesaria’s own words summarizing one of his most important investment criteria.
• At 53:16 - "Be a quote, 'business historian.' He kind of describes himself as that. He's trying to be a business historian." - The hosts emphasize Kantesaria's deep-dive approach into a company's past to understand its future durability.
• At 57:16 - "It's our view that AI becomes commoditized, and then it becomes difficult for these companies to monetize their AI offerings." - A direct quote from Kantesaria expressing his skepticism about the long-term competitive advantages of AI.

Takeaways

• Prioritize pricing power above all other metrics; a company's ability to consistently raise prices above inflation is the clearest sign of a superior, durable business.
• Look for opportunities in "market neglect" rather than just waiting for market crashes, as high-quality, boring businesses are often mispriced due to a simple lack of attention.
• Adopt the mindset of a "business historian" by studying a company's entire history, especially its performance during past downturns, to truly understand its resilience.
• Once you own a high-quality compounding business, the best course of action is often inaction; have the conviction to let your winners ride and become a large part of your portfolio.
• Search for "untapped" or "masked" profitability where a company's true earnings power is obscured by temporary factors, such as a long history of not raising prices.
• Buy exceptional businesses when they are facing maximum pessimism, as market overreactions to short-term "noise" can provide generational buying opportunities in durable franchises.