It’s a tiny company and very under-the-radar. But it has big ambitions. I think it could be a much bigger business in 5 or 10 years, although of course there are no guarantees.

Despite its strong business progress, the share price has languished. I believe this is an opportunity for patient, long-term investors.

Important: The information on this website is for informational purposes only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

I know this model well

I’m highly familiar with the serial acquirer model.

I’ve seen what works (e.g. Diploma), and more importantly, what doesn’t. I’ve internalised the lessons and discussed them extensively (in articles and podcasts).

What I look for, in a nutshell, is:

• Great management who excel at capital allocation and operations

• An entrepreneurial, decentralised, lean culture

• A focus on acquiring high-quality, durable, defensible businesses, preferably with high levels of repeat or recurring revenue

• A very wide acquisition funnel

• The ability to acquire cheaply (preferably single-digit EBIT multiples) and the discipline to walk away

• The ability to improve acquired businesses

• A focus on cash flow and returns on capital above all else

I believe this company ticks all these boxes.

What’s the company?

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Two companies that have succumbed to this narrative are creative software powerhouse, Adobe and Roper Technologies, a diversified conglomerate of (mainly) vertical market software (VMS) businesses.

The aim of this article isn’t to predict what AI might do to software (just as well because I don’t know). Nor is it to do a deep dive into Adobe and Roper’s business models.

Instead, I offer six widely-applicable principles, grounded in my 20 years experience as an investor, to assess Adobe and Roper’s prospects.

The beauty of these principles is they can be applied to almost any situation. And you don’t need to be an expert on the business. Nor do you need to predict the future. You just need to position yourself correctly.

Important: The information on this website is for informational purposes only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Roper Technologies.

Knowing vs. not knowing

There are very few things I’m certain of as investor. But I’m sure of one thing - I don’t know how the future will play out.

This is a problem. Because the job of an investor is to assess the future, not the past.

Most investors think this means predicting what might happen - ‘the industry will evolve in this way, competitor X will do Z, the way technology is heading means XYZ will happen.’

A different, and far less common, approach is to simply accept you don’t know, and invest accordingly. This is the approach I take.

I’m not trying to predict the future. I’m not investing based on X, Y or Z happening. I’m trying to position myself for a range of outcomes - to be approximately right, rather than precisely wrong. And, above all, to stay in the game long enough for compounding to work.

This is where the principles come in.

Principle 1 - Diversity beats narrow focus

Diversity is essential to life on earth. If every individual were the same, an environmental change could wipe out the entire group. The more diverse the population, the more resilient it is and the more likely it is to survive.

Business works the same way as evolution.

Narrowly-focused businesses are inherently more vulnerable to change than diverse ones. Kodak, Blockbuster and the Yellow Pages didn’t go to the wall because they had a range businesses to fall back on. They did so because they were focused on cameras, videos and paper directories. Then the world changed.

A diverse business, all else equal, is much more resilient. If you have ten lines of business and one stops working, you just focus on the other nine. You don’t lose a lot of sleep.

So, how do Adobe and Roper stack up on this principle?

Well, creative software accounts for about 70% of Adobe’s business. If anything happens, with AI or anything else, to disrupt this position; there’s very little it could do.

Roper is a a diversified conglomerate of around 30 businesses. Most, but not all, are VMS businesses. And they each serve different verticals and customer groups. If AI renders software obsolete, it’s in trouble. If AI has differing effects on different industries, Roper’s diversity is an enormous advantage.

In sum, I see the risk of technological obsolescence as much higher for Adobe than Roper, because AI (or any other technology) would have to wreak havoc on many unrelated industries at once; whereas the consequences for Adobe of the creative software market evolving in an unfavourable direction don’t bear thinking about.

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Principle 2 - Discretionary capital deployment beats non-discretionary

A lot of the time, businesses spend money because they feel forced into it, not because they want to. More often than not, this leads to dumb decisions and poor returns.

A narrow focus on a particular industry makes this defensive spending much more likely.

If a competitor makes a certain move, you have to respond. If you see a chance that technology will evolve in a particular direction, you need to do something. The risk of expensive, ‘transformational’ acquisitions to try and defend your competitive position is much higher.

We saw this with Adobe back in 2022 when it tried to acquire Figma for $20 billion (c. 50x revenue). That deal collapsed for antitrust reasons, which might be just as well for Adobe’s shareholders, because Figma is now valued at less than $15 billion.

Roper, for the record, has also done some pricey acquisitions, but none were anywhere near 50x revenue. None were ‘transformational’. And none of its bigger acquisitions were done to try and eliminate a competitor.

When Roper acquires, it’s acquiring cash flow. Its capital allocation decisions are largely discretionary and returns-driven. It’s industry-agnostic, which gives it options Adobe frankly lacks. It means there’s a much greater chance of Roper at least earning a reasonable return on its acquisition spending in my book.

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Principle 3 - The ability to get out

Warren Buffett one said:

Once Buffett realised the textile mill was doomed, he didn’t keep throwing good money after bad. He diverted cash to more productive uses and let the textile mill die. The rest is history.

Narrowly-focused businesses don’t really have this option. Strictly speaking, they do. But in practice, when all you know about is cameras or videos or phones, you’re unlikely to start diverting cash into unrelated industries. Instead, you fight to the death.

I’m not suggesting creative software is going the same way as video rental. I’m merely asking what would happen if it did?

Would Adobe recognise this before it was too late, sell off these assets to the highest bidder and reinvest in other businesses or completely new ventures? A passing knowledge of history, human psychology and Adobe’s corporate mission (“to empower everyone to create”) suggests it’s unlikely.

Roper is in an entirely different position. Its aim is to compound cash flow. It doesn’t care whether those cash flows come from software, technology-enabled products or indeed industrial assets (which it used to exclusively own, but then sold).

If it sees challenges on the horizon it can sell, or even just let the business die and divert the cash elsewhere. In a changing world, this ability to acquire, dispose and divert cash to its most productive use; lends a lot of resilience that more narrowly-focused businesses generally lack.

Principle 4 - The power of focus & specialisation

One argument in favour of specialist businesses is the power of focus. A company focused on one specific thing should do a better job than a company focused on lots of different things.

I agree.

Adobe is a much better business for focusing mainly on Creative Software than if it focused on many other markets besides.

However, a decentralised serial acquirer like Roper benefits from much more specialisation and focus than it first appears. Only the very few people at headquarters are jack of all trades. Everyone else is relentlessly focused on adding value within their specific and highly specialist niche.

In fact, because serial acquirers like Roper benefit from broad diversity at the group level, it allows individual businesses to go very niche. It’s the best of both worlds.

Adobe, as the market leader, needs to be a jack of all trades within the creative industry, to some extent. It can’t afford to focus on one part and ignore the others. When viewed this way, a business like Roper benefits from a far higher degree of focus and specialist expertise than Adobe could ever achieve.

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Principle 5 - niches beat larger markets

Investors and businesses tend to be attracted to large addressable markets because they offer greater room for growth and expansion. That is true. However, it misses the point.

History has consistently shown that the larger, faster-growing and more exciting a market; the more likely it is to come under competitive attack.

In the long-run, the growth of a businesses isn’t determined by how much its market grows. It’s driven by the share of the spoils it can take. This is dictated by competition. It’s why airlines and motor companies have been terrible investments, despite air and car travel having boomed over the last century.

Niche markets dominated by a handful of players are much easier to defend. The prize up for grabs is so small, and the existing players so entrenched, that it often isn’t worth the effort for new competitive entrants.

Creative software is a large, rapidly-expanding industry with Adobe alone generating almost $20 billion of annual revenue from this market. By contrast, Roper’s entire revenue was only c. $8 billion last year, split between around 30 business units (suggesting average annual revenues of <$300 million for each one).

Growth in Roper’s niches is often steady, rather than spectacular. Moreover, it targets niches that are frankly pretty dull, like making brass water meters or software for school administration. These markets aren’t top of the list for any aspiring entrepreneur to enter.

Of course, small, narrowly-focused businesses also carry vulnerability. But history suggests a diverse set of niches, each ferociously defended by specialist operators, is hard to disrupt. It’s what Roper has. A large, exciting market with a steady cadence of new start-ups (e.g. creative software) - not so much.

Principle 6 - Critical, highly-regulated, B2B functions are more defensible

Generally, the more critical the good or service, and the more heavily regulated the industry, the less likely companies will be to consider alternatives. This is because the risk of something going wrong usually doesn’t bear thinking about.

As a result, trust, reliability and expertise tend to carry more weight than price in these industries. Which means competing providers must offer something meaningfully superior and/or much cheaper, just to stand a chance of entering the conversation.

In addition, businesses tend to be more reluctant than consumers to try new things.

There are more decision-makers involved in a business, which tends to lead to slower decisions (and often no decision). While consumers often seek novelty and excitement, employees tend to just want an easy life and to keep their jobs. For consumers, appearance and status often drive buying decisions (it’s why the iPhone is so popular). For businesses, functionality and practicality tend to carry much more weight.

So, as a general rule, businesses serving other businesses (B2B) tend to be less subject to change and disruption than businesses serving consumers (B2C).

Adobe’s creative software is critical to a few people in the organisation (creative professionals) who rely on it every day to do their jobs. However, it isn’t critical to other parts of the organisation (like finance), and if it stopped working, most businesses wouldn’t grind to a halt.

Regulation in the creative software industry is also fairly light touch (copyright laws, licensing agreements etc); and while Adobe is predominately a B2B business serving enterprises, almost a third of its creative subscription revenue comes from business professionals and consumers.

What about Roper?

Well, the software and technology-enabled products it sells are mission-critical within their niches (things like legal billing, school administration, medical diagnostics). If they stop working the business is in big trouble. Around 18 of its 21 software businesses (and the majority of its technology-enabled products) operate in regulated end-markets. And Roper doesn’t have any B2C revenues. This ought to make its business model much easier to defend.

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So, is Roper a better investment than Adobe?

Not necessarily.

I haven’t studied Adobe’s business thoroughly enough to understand its prospects (and to be honest, I’m not sure it would greatly help). I haven’t discussed the respective cash flows and accounting; nor their respective valuations. I haven’t discussed management or culture.

Someone who understands Adobe’s business and markets deeply, its position within them, and how this may evolve in response to AI threats, competition etc. may have a view on whether the current valuation offers enough margin of safety. That person isn’t me.

Adobe is the sort of business I could spend months researching and it would still likely sit in my “Too Hard” pile.

My investment approach embraces simplicity and eschews complexity. I try to be reasonably assured of a decent outcome, rather than less assured of a spectacular one. I try to be ‘not stupid’ rather than very intelligent. I try to accept there’s very little I actually know and invest accordingly, rather than assuming I know things. This leads me to principles and positioning, over predictions. Which leads me to Roper over Adobe.

Adobe may well offer the prospect of higher returns, especially if AI disruption risks are overblown. But Roper looks the far safer bet to me, with a narrower range of outcomes. This is owed to its diversity, ability to evolve its portfolio (e.g. through acquisitions and disposals) and its industry-agnostic approach; combined with its focus on specialist, niche, mission-critical functions within conservative and often regulated B2B settings.

Thanks for reading and all the best,

Charlie

PS. I recently bought a new position in a serial acquirer, which fits these principles to a tee. It will be profiled next week, for paying subscribers. Sign up today to avoid missing out.

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In the video I discuss:

• Why I regard Compass and Next as two of the finest businesses around

• The power of scale economies shared

• How to avoid over-paying for quality stocks

• Why many quality companies have got worse

• My views on Unilever, Diageo, Costco, Berkshire Hathaway and Jet2

• The upcoming 2026 Investor Summit - and how to get £15 off

The link to the YouTube video is below, and you can also listen here (episode 186) and on Spotify.

If you enjoy it, I’d appreciate if you could share it and spread the word.

All the best,

Charlie

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Compass Group, Next Plc and Diageo.

The biggest is an understanding of just how difficult managing funds is.

Most fund managers face major disadvantages compared to private investors. What are they? Why do they matter? And how can private investors use this knowledge to stack the odds in their favour?

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

Terry Smith lays bare the challenges

Terry Smith’s recent half-year letter lays bare many of the difficulties facing open-ended fund managers. Perhaps the biggest is managing flows.

Investor behaviour is extremely pro-cyclical. When a fund is performing well, they buy, and when it isn’t they sell.

Beyond the day-to-day challenges this causes, it also poses a bigger problem. A fund management business lives or dies by its assets under management (AUM). The higher the AUM, the higher the fees and the more profitable the business.

If performance starts to lag the benchmark, large outflows can result, causing AUM and fees to plummet. This leads to those in charge of the business becoming unhappy, and may eventually cause the fund to close.

This creates enormous pressure on fund managers to avoid periods of significant under-performance, which often leads to the following behaviours:

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1. Benchmark hugging

Most fund managers would rather fail conventionally than succeed unconventionally.

One way to achieve this is to look at least somewhat similar to the benchmark. As a result, fund managers often feel forced to own stocks that are heavily represented, such as the ‘Magnificent 7’ (normally after their shares have risen a long way); and/or to have similar sector and industry exposures to the benchmark.

Some funds impose formal limits, e.g. a maximum of +/- 2% versus the benchmark in each position. Nearly all employee risk committees to give fund managers a slap on the wrist if they deviate too much from the index. Some funds employ few formal limits (aside from regulatory ones), but the perceived career risk is enough to keep fund managers in line.

These restrictions are probably beneficial if the fund employs a mediocre or worse fund manager. But in this case you should just buy a passive and avoid the fees. If the manager has a degree of talent, these restrictions will significantly hold him or her back.

A private investor has no such disadvantages. They don’t have to pay attention to the benchmark, unless they want to. They can own the stocks and sectors they have conviction in and ignore everything else.

In the long-run, this is a far better way of managing money than being forced to own things just because they’re part of a benchmark.

2. Over-diversifying

A related issue is the perceived need many fund managers face to own lots of positions.

This again can be driven by the desire not to stray too far from the index. Or by a lack of conviction. Or by liquidity or regulatory considerations. Whatever the reason, it normally leads to professional portfolios being a lot more diverse than they need to be.

This in turn can cause problems, including:

• The difficulty of researching and monitoring so many positions

• Owning businesses you don’t really understand

• Owning lots of small positions that don’t make much difference

As long as a portfolio is sensibly constructed, adding more than about 25 positions brings only disadvantages, with very little diversification benefit; in my opinion.

Again, private investors are enormously advantaged here. Instead of having to keep tabs on hundreds of companies, they can own far fewer, higher conviction positions they’ve followed for years. If they don’t understand a business or feel they have no edge, they can leave it well alone.

3. Short-term investment horizons

Since most fund managers can’t risk under-performing for long, they need positions to ‘work’ in fairly short order. They can’t own many shares that do nothing for ages. And they certainly can’t own many that are performing badly.

Regardless of the stated investment philosophy, this tends to result in an approach best summarised as guessing which share prices will do well over the next 12-18 months.

Normally, this means buying stuff that’s done well recently (embracing momentum), while giving a wide berth to companies that face issues or are unloved or ignored (unless they have an obvious near-term catalyst).

Private investors have the luxury of thinking and acting long-term. They can focus on the things most fund managers don’t pay enough attention to; that matter enormously to long-term business prospects, like:

• Management and culture

• Investments with longer-term pay-offs

• Risks that tend to materialise on a longer-term time-frame (e.g. regulatory issues, competition, poor customer relations etc.)

In a world of almost limitless information, driven increasingly by near-term headlines, it’s hard to over-state this behavioural advantage.

4. Pressure to depart from a well-reasoned investment philosophy

One of the biggest investing edges is sticking to a well-reasoned investment strategy when the going gets tough.

Every investment approach goes through periods where it’s massively out of favour. The key is having the patience and discipline to ride these out - to focus on the process, not short-term outcomes.

As I’ve explained, most fund managers can’t afford to stick with a strategy that isn’t working. This means they’re much more susceptible to change course, or subtly deviate from their strategy, at the worst possible moment.

Private investors don’t have this problem. They can wait patiently for their investment approach to return to favour. That’s an enormous advantage most professionals lack.

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5. An unwillingness to look stupid

The desire to keep investors ‘on-side’ often makes it hard to sell positions you’ve previously said nice things about, or to hold companies that are fundamentally sound but difficult to own (perhaps because they’re mired in controversy). It also makes it harder to admit mistakes.

To be a successful investor, you must be willing to look like an idiot and rub your nose in your mistakes. This isn’t easy (whether you’re a private or professional investor). Everyone has an ego and it’s always more comfortable to preserve it than admit you were wrong.

But private investors should have a much better chance of it than the pros. Not least because they don’t have to air their dirty laundry in public. Nor do they need to justify their enormous salaries to their bosses. They answer only to themselves.

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Surely the pros have some things going for them?

Of course. These include:

• Huge research budgets

• Access to more information

• Access to management

• Bloomberg and other data licences

• Large internal resources - e.g. sector-specific analysts

Each can be very useful. However, these advantages don’t carry as much weight as you might imagine, and can easily become drawbacks.

For example, meeting management one-to-one can introduce significant biases. CEOs of public companies are usually very good at selling stories. And very adept at explaining away trading difficulties and profit warnings.

The majority of institutional sell-side research (from the likes of JP Morgan, Barclays etc.) is worse than useless - biased, short-term and lacking in fundamental business insights, in my opinion. It does more to increase confidence than accuracy.

Bloomberg has some excellent features. But mostly it’s just an enormous distraction.

As for internal analysts feeding recommendations to fund managers - well, I’m not much of a fan. Second-hand information can never be as good or insightful or inform as well or lead to the same depth of understanding, as information acquired first-hand. At best, it’s a double-edged sword.

Part 2

In the second part of this article I discuss how, in spite of all these advantages, private investors still go wrong. And the tricks you can employ to prevent this.

I also discuss a rare fund group that manages to avoid the common institutional traps. They have a very low profile. But I think their quality-focused fund is an excellent alternative to Fundsmith. They also provide insightful commentary on quality businesses and investing in general; which I’ve personally found invaluable.

I thought you might benefit too.

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What did I make of them?

Read on to find out.

Important: The information on this website is for informational purposes only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in all the companies mentioned, aside from Amazon.

Next - yet another upgrade

Next, the UK-listed clothing and homewares retailer, delivered a trading statement which basically said - “We’ve performed much better than we thought… but it’s largely due to external tailwinds which won’t repeat… so don’t expect this performance to continue”.

This is classic Next.

Consistently under-promise and over-deliver. Don’t let investors get ahead of themselves. If things go well - always attribute it to something other than your own brilliance. If anything doesn’t go well - take ownership and put it right. It’s precisely the opposite of how most companies function. And enormously refreshing.

For the record, Next’s full price sales were up over 9% in the second quarter. Its online overseas business was the major contributor (sales up 37%) and got the headlines. But in fact, it was the performance of Next’s UK online business that impressed me the most.

UK online sales rose by 5%, which doesn’t seem anything special. But last year Next benefitted from severe trading disruption at a major competitor (Marks & Spencer, due to a cyber attack). This meant Next’s UK online business grew an exceptional 9.5% in Q2 last year, presenting a very tough comparable for the quarter just gone.

So, the plus 5% growth was a very robust performance indeed. Of particular note was the performance of LABEL - wholly-owned brands and licences combined with third-party brands. This part of the business actually saw its top-line accelerate (+13.2%) versus the same period last year (+10.1%).

With these twin growth engines (LABEL and online international) firing on all cylinders, I‘m inclined to view Next’s excellent performance as more secular and durable in nature, than cyclical. While the weather and consumer confidence will of course dictate quarterly outcomes, the evidence suggests Next is becoming a higher-growth, higher-quality business that deserves to trade on a premium valuation.

Which is just as well, because the shares have re-rated. They now trade on a P/E for the current year of around 19x, up from a mid-teens P/E at the start of the year. That might strike some as rich for a mature retailer with most of its sales still generated in the UK. But to me it feels about right for a business as well-managed as Next, with multiple internal growth drivers. I continue to hold.

For more on Next see my recent article.

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Ametek - capitalising on favourable markets

Many industrial companies are experiencing a bit of a boom right now.

There are a few reasons for this. De-stocking that has plagued the sector in recent years has finally come to an end. Even before the Middle East conflict, companies had gradually started to rebuild inventory. The conflict has provided added impetus to these efforts, due to worries around inflation and potential component shortages.

Second, the on-going boom in aerospace and defence has strongly benefitted companies exposed to these markets.

Third, many industrial companies are tapping into the colossal sums being spent on AI data centres, either directly (supplying components into the data centre itself) or indirectly (supplying power, industrial machinery etc).

Ametek’s businesses supply critical components into a number of these markets, including aerospace, defence, the power grid build-out, and semiconductor manufacturing. As such, it appears to be in the right place at the right time.

Its second quarter results on 4 August were exceptional. Revenue increased 15% and adjusted operating profit by 18%. Notably, for the second quarter in a row, orders were extremely strong, growing 28%. With orders taking time to convert into sales (reflecting the unique, customised nature of Ametek’s products), this augers very well for FY27.

Ametek’s operational execution continue to be top notch (I spoke about this here). Whether its markets are strong or weak, Ametek is relentless in pursuing efficiencies and maximising the benefits of its scale. The second quarter was another case in point - core margins (excluding acquisitions) rose by 110 basis points. Ametek’s adjusted operating margins now stand at a record 26.6%, up from 23.6% in 2021.

How sustainable is this performance?

Well, many of Ametek’s end-markets have been through a multi-year period of weakness and are only recently showing signs of life. So, it feels like there should be much more to go for. With incremental margins of c. 40% there ought to be more to go for on that score too.

The only sticking point for me is valuation. At a price of $256 the shares trade on over 30x this year’s earnings, which seems well up with events. As such, I will likely top-slice my position if the shares continue moving higher.

Microsoft & Amazon

Both Microsoft and Amazon delivered exceptional second quarter results, driven by their cloud businesses and accelerating AI demand. Amazon Web Services (AWS) grew revenue by 37% (its fastest growth in 18 quarters) while Microsoft Azure and cloud services grew by 43% (up from 40% in the previous quarter). Their shares rallied strongly in response.

AI demand continues to significantly out-strip hyperscaler’s ability to supply compute services. As such, capital expenditure continues to go through the roof (combined spend from Microsoft and Amazon of c. $400 billion in 2026). This spending was a great concern to investors prior to the results. However, the accelerating cloud revenue growth in Q2, at great profitability, appears to have assuaged these worries for now.

Personally, I‘m still very sceptical about the returns hyperscalers will achieve on this spending; not least because the decision to spend this money seems entirely non-discretionary (they have to do it or risk being left behind in the AI race).

My scepticism was reinforced by

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The CMD was a chance for Diageo’s shareholders to get much-needed answers and for new CEO, Dave Lewis, to set out his vision.

It didn’t disappoint.

In this article I’ll discuss Diageo’s results, the CMD and investment case.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Diageo.

My take on Diageo’s FY26 results

The results were a bit better than analysts had expected. This is the benefit of low expectations.

Organic net sales fell 2%, but operating profit before exceptional items rose 2%; helped by significant cost savings.

There are two principal reasons for the sales weakness.

Chinese White Spirits net sales fell 45%. This largely appears to be due to a policy-driven shift away from luxury gifting and government banquet consumption; and seems quite specific to the Chinese market. Anyway, it took c.1.5% off group sales. The impact of further sales declines should be less severe from here.

The more concerning factor is what’s going on in North America, Diageo’s largest market. Organic net sales here fell by 8.4%, with US spirits down 11.5%. This was largely due to a 21% net sales decline for Tequila, with increased competition and consumer downtrading impacting sales of both Don Julio and Casamigos.

Progress on cost savings has been more encouraging. The ‘Accelerate’ programme delivered a better-than-expected $540 million of savings in FY26 through more efficient marketing investment, as well as supply and overheads cost savings.

As a result, organic operating margin rose by 116 basis points; with operating profit and EPS (before exceptionals) both coming in a bit ahead of analysts’ expectations.

Outlook

A big concern ahead of these results was whether Diageo would have to go backwards in order to go forwards.

Would Dave Lewis do a classic kitchen sink job? Would required investments in restoring competitiveness see margins and profitability fall? Would investors have to endure yet more pain, before the new strategy started to bear fruit?

The answer to each of these questions is no.

Diageo’s guidance for FY27 is:

• Flat organic net sales growth

• Organic operating profit up low-to-mid single digits

And from FY27 to FY29 the group expects:

• Organic net sales up low-single-digits

• Organic operating profit up mid-single-digits

• EPS growth ahead of profit growth, on a currency neutral basis

This guidance is underpinned by an enormous $1 billion of cost savings over the next three years, equating to almost 20% of Diageo’s FY26 operating profit. The bulk (c. $850m) will come from a redesign of Diageo’s operating framework (with significant headcount reductions), with the remainder from supply chain savings.

These savings should allow the group to invest selectively to improve competitiveness (which is desperately needed), while enabling further expansion of organic operating margins (also crucial to keep shareholders on side).

Cost savings seem achievable

I’m not surprised by the magnitude of cost savings announced by Diageo, and I believe they are achievable.

My confidence is underpinned by a few factors.

The first is Dave Lewis (‘Drastic Dave). As I discussed here, I view Lewis as a very astute operator. He gets his nickname from his relentless focus on cost cutting, rationalisation and shareholder value. It is deserved and his track record inspires confidence.

When Dave Lewis took charge of Tesco in 2014, the business was focused on growth at any cost. It had become complacent, bloated and over-extended. Lewis simplified the business, returned the focus to what mattered (customers and prices) and prioritised profit and cash. Instead of opening up lots of new stores, he set about making existing ones better (while closing the worst performers).

Diageo, like Tesco back in 2014, has to accept its market has changed. Mid-single-digit sales growth before the pandemic - and certainly the post-pandemic boom - are a thing of the past. Diageo today is a low-single-digit grower, at best. This requires a different cost base and a different mind-set.

The good news is Diageo’s historical inefficiency leaves a lot of low hanging fruit to go after.

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Cultural transformation

Make no mistake, Dave Lewis is enacting a total transformation of Diageo’s culture. It’s desperately needed, and if it works it could transform the group’s prospects.

Some of the key changes include:

• Simplification

Diageo has become way too complex. It has too many middle-managers, too much duplication, too much fragmentation and too many different initiatives.

Everything Dave Lewis is doing is designed to reduce complexity and increase simplicity (his mantra is - ‘Complexity fails, simplicity scales’). If he gets it right the business should become much more scalable, agile and efficient.

• Driving accountability

Diageo has also suffered from a profound lack of accountability. There are too many cooks in the kitchen and no one even knows who the head chef is. You see it in a lot of large businesses and the implications are disastrous. It leads to very slow decision-making, confusion about who’s responsible for what, endless meetings and a lack of incentive to get anything done.

Dave Lewis is tackling this head on. He’s already driven a massive increase in accountability and responsibility by transforming Diageo’s operating structure; for example there’s now one person with complete responsibility for the supply chain. It can only be a positive as far as I’m concerned.

• Giving customers what they want

Diageo has lost focus on the customer. For example, it’s been excessively focused on the top end of the pricing ladder and has neglected lower price points. Right now, lower prices are what squeezed consumers really need.

Dave Lewis intends to give it to them. This entails embracing ready-to-drink (RTD) formats, selective investment in price and focusing on cheaper, smaller pack sizes.

Put simply, Lewis is designing a culture where consumer preferences dictate the strategy, not the other way round. To my mind, it’s the only sustainable way for a consumer goods company to operate.

• Eliminating waste

Diageo has been hugely wasteful with shareholder money, with significant duplication of functions and not enough focus on day-today productivity. Dave Lewis is changing this. Expect every cost to be scrutinised. Every inefficient way of operating to be redesigned.

It’s not about skimping on necessary investments. It’s about minimising unnecessary ones as much as possible. These costs make no difference to customers. By eliminating them, Diageo can double-down on investments that make the biggest difference - like customer service and low prices.

• Prioritising cash, returns & shareholder value

Diageo’s capital expenditure and inventory investments have not delivered good enough returns for shareholders. The group has also wasted lots of money on expensive acquisitions - including $1 billion for Casamigos in 2017 (net sales down 27.7% in the last year) and $282 million (plus earn-outs) for Don Papa Rum, which incurred a $287m impairment charge in FY26.

Expect this to change under Dave Lewis. Every dollar of capital investment will be scrutinised, with resources prioritised to the best opportunities. An increased focus on cash flow will pervade the organisation, with incentives redesigned accordingly. And expensive acquisitions will be off the cards, with a resolute focus on improving the existing portfolio.

I’m less confident about revenue growth

Efficiency, costs, cash and returns are all - to a large extent - within Dave Lewis’s and Diageo’s control. Growth is a different matter.

Consumer preferences seem to be changing faster than ever. And competition in alcoholic beverages is fiercer than ever, with social media, celebrity endorsements and the like creating a cacophony of noise and new brands all trying to get in on the action.

Then of course, there are the long-term threats from things like GLP-1s. I honestly don’t think these have had much impact so far; but we can’t rule out a bigger effect in the future.

Then, and most worryingly, there’s the affordability issue.

Booze costs a lot more than it once did, especially in pubs and restaurants. This means consumers are drinking less and/or downtrading. And it’s a problem I struggle to see a solution to.

Tequila is also a major headache

A few years ago, the Tequila category was booming. This lent strong support to Diageo’s sales, especially in North America.

This trend has now reversed.

Two things have happened. There’s been an explosion of new celebrity and craft labels leading to market oversaturation. This was always likely because unlike aged dark spirits, there is not the same barriers to entry in Tequila.

Secondly, Tequila has lost some of its hype. We saw it with gin a few years ago, then rum. Demand for individual spirits categories tends to be cyclical and rather fad-driven. Tequila had its moment in the sun. Now consumers seem to be losing interest.

One of the beauties of Diageo’s business historically has been its diversity. The popularity of different alcohol categories waxed and waned, but it didn’t really matter. Consumer spending on alcohol didn’t change, it just shifted. Diageo was so diverse that weakness in one category was usually offset by strength in another. All bases were covered.

This hasn’t been the case lately. Tequila became too popular, which, combined with the acquisitions of Don Julio and Casamigos, saw Diageo’s Tequila sales rise to above 10% of sales. This has caused a big headwind as Tequila sales have moderated, especially in North America.

To compound matters, not only are consumers drinking less, but demand has shifted to one of the few categories where Diageo is poorly represented - RTD (4% of FY26 net sales).

If this trend continues, which seems likely, it will continue to be a headwind to Diageo’s sales growth.

My view on Diageo’s shares

Putting it all together, what’s my view on the investment case for Diageo today?

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What did I make of them?

Read on to find out.

Important: The information on this website is for informational purposes only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in the companies mentioned.

RELX - proving the doubters wrong

RELX’s results were again very solid. First half revenue rose 7%, adjusted operating profit by 9% and adjusted EPS grew 11% (all on an underlying, constant-currency basis).

RELX’s management remain convinced AI is more an opportunity than a threat. Of course, management teams are invariably optimistic and it pays to treat what they say with a large pinch of salt. But RELX’s management are about as un-promotional as they come. I trust what they say. And the signs so far seem to back-up their confidence.

RELX saw strong renewals and new sales across all key segments in the first half. That’s important because the nature of RELX’s revenues (multi-year, subscription-based) means it takes time for new sales to feed through to revenues. In other words, today’s revenue tell us very little about tomorrow. But today’s sales of new subscription contracts (to new and existing customers) are a good leading indicator.

RELX also saw very strong uptake and usage of its AI tools. That’s also important because it suggests customers see value in sticking with RELX for AI solutions, rather than going elsewhere.

Unlike many other companies, RELX is already monetising these AI revenues. This drove an acceleration in underlying revenue growth in both its Legal division (up 10% in the first half, versus 9% in FY25) and Scientific, Technical & Medical (STM) division (up 6% from 5% in FY25). Crucially, RELX is confident of sustaining this momentum.

What explains this strength - and management’s confidence - given the explosion of AI-native start-ups?

Well, for a start, most of these AI-native tools don’t compete directly with RELX’s solutions. Instead, they’re targeted at improving workflow efficiency (e.g. executing, automating, and completing multi-step tasks). This is a huge and attractive market, and RELX plays around the edges. But it’s not its bread and butter.

RELX’s AI tools largely target highly specialist, information-based analytics and decisioning niches. They leverage its proprietary, deeply-curated content. And they’re deeply integrated into customer workflows, sitting on top of RELX’s broad, integrated platforms. This is not only a less crowded field. It’s one where RELX has a distinct advantage, by nature of its proprietary data (which is not accessible to Large Language Models) and formidable distribution.

Clearly, the group cannot afford to get complacent. AI continues to advance at a rapid pace. RELX must stay on top of this and continue to innovate to remain competitive. But, so far, it appears to be doing so and I’m encouraged by what I see.

The shares have rallied since the results, which doesn’t surprise me. But they still trade on less than 20x this year’s earnings at the current price of £28.27 (based on my forecasts. This is very good value, in my opinion, for a business capable of at least high-single-digit EPS growth through the cycle. It remains a core holding (for more on RELX, see my recent article).

Danaher - still testing investor patience

US-healthcare giant, Danaher delivered another frustrating quarter, despite most parts of the business seeing better momentum. The shares reacted badly, ending the day about 11% down, albeit they have since recovered.

The problem child this time was the bioprocessing business, which grew revenue by low-single-digits versus an expectation of high-single-digit growth. This was attributed to shipment delays in consumables (mainly chromatography resins), at a small number of large customers incurring “production schedule changes and site readiness challenges”.

How worried should investors be?

Well, it doesn’t sound like market dynamics have changed. Indeed, Danaher saw mid-teens growth in orders for both bioprocessing consumables and equipment in Q2. Peers, Sartorius and Thermo Fisher, also reported robust bioprocessing growth in their most recent quarters. This suggests demand for biological therapies remains reasonably strong.

Nor does it sound like a competition issue because the delayed shipments were primarily for commercial programs Danaher is specced into. Once specced into a drug manufacturing process, customers are extremely reluctant to change suppliers, not least due to regulatory hurdles.

However, it does suggest Danaher has rather less visibility in this part of the business than I’d envisaged; as well as potentially more reliance on a few large customers (and drug programmes). It’s also another blot on the copybook for management, whose credibility with investors is wearing thin.

Despite the bioprocessing setback, Danaher still expects to grow EPS by 10% this year; underpinned by better-than-expected growth in Life Sciences, and tight cost control. It also still expects to exit the year at mid-single-digit core revenue growth (versus +3% in Q2).

Looking ahead to FY27 and beyond, high-single-digit EPS growth seems achievable for Danaher, assuming the delayed bioprocessing shipments are indeed temporary and don’t portend something more sinister. With around 90% of adjusted earnings converting into free cash flow; the valuation of c. 23x this year’s earnings doesn’t appear unreasonable.

However, my conviction in the business has weakened. Management have consistently over-promised and under-delivered. They’ve also done some very expensive acquisitions, including Aldevron, Abcam and, more recently - Masimo - for c. $10 billion.

Even after synergies the Masimo deal is only expected to achieve a high-single-digit return on invested capital by Year 5; which is disappointing. This (combined with some poorly timed share buybacks) makes it hard for me to have much confidence in management’s capital allocation.

I retain a modest position, because I still view Danaher as a solid business operating in some attractive end-markets (and I want to keep following it). But I don’t think it merits more of my capital at the current time.

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Diploma - yet another upgrade

It seems like every time Diploma opens its mouth, it upgrades expectations. The Q3 trading update on 16 July was no exception. It now expects operating profit growth of 42% for the year, with organic revenue growth of 14% and an operating margin of 26.5%.

This is very impressive. But it begs the question - has Diploma created a rod for its own back? Given very tough comparatives the business will face in FY27, is this as good as it gets, at least for a while?

Let me share some thoughts.

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Switching costs, distribution networks and economies of scale no longer seem so robust when AI-native companies can replicate your business model at a fraction of the cost.

But there’s one advantage that remains and arguably gets stronger. It’s commonly overlooked. Partly because it’s misunderstood. But mainly because it’s so profoundly dull.

However, it’s extremely powerful. And companies that embrace it possess enormous advantages over those that don’t.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

What am I referring to?

Frugality.

The best businesses have invariably found a way to do more with less. They’re ruthless in minimising unnecessary costs, allowing resources to be focused on where they can deliver the best results.

Frugality is one of the biggest competitive advantages I’m aware of, because it enables one of two things (sometimes both):

• Higher margins

• Lower prices

Sam Walton, Walmart’s founder, realised this early on.

Walton was famously frugal and no expense was too small to escape his attention. But rather than keep these margin gains, he reinvested them in lower prices. This led to an unassailable cost and pricing advantage less frugal competitors couldn’t match.

Aldi and Lidl’s success stems from much the same principle – keep unnecessary costs to a bare minimum with no-frill stores in cheap locations, and use the savings to fund lower prices. Rinse and repeat.

A common misconception

Frugal operators are commonly misunderstood. Unlike most companies they don’t waste money on PR campaigns, consultants, expensive advertising or fancy offices. Put simply, they avoid status signalling.

In addition, they don’t spend money on ‘growth projects’ unless they’re likely to create value. This can sometimes lead to accusations of underinvestment.

But frugality isn’t about skimping on necessary investments. It’s about minimising unnecessary ones as much as possible. These costs make no difference whatsoever to customers.

In fact, by avoiding the unnecessary costs most companies mindlessly embrace, frugal companies can double-down on investments that make the biggest difference - like customer service, R&D and low prices.

This reinforces their competitive edge, making them even more difficult to compete with.

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Why frugality is so rare

If frugality is so powerful, why don’t more companies embrace it? I can think of a few reasons:

• Misaligned incentives

Most CEOs don’t own the companies they run, and most have relatively small shareholdings. It’s always much easier to spend someone else’s money than your own.

Spending money can also bring power and status. In many organisations, the more employees you oversee, the more powerful you become and the more you’re likely to get paid.

What’s more, in large businesses, it’s often safer to get someone else to make decisions. Paying a consultant, buying a Gartner report, or offloading decisions onto expensive committees means there’s always someone to blame if it all goes wrong.

• Bureaucracy leads to natural bloat

As companies get bigger, they naturally become more bureaucratic and less efficient.

Employees are no longer trusted to do their jobs. Policies and processes replace common sense. It becomes harder to monitor expenses, and easier for lazy employees to coast.

This means even the best-intentioned of companies typically wastes a lot more money as they get bigger.

• Laying people off is unpleasant

I’ve never worked with anyone who enjoyed letting employees go.

This means most companies have way more staff than they need. It also means low performers tend to stay in organisations way longer than they should.

Instead, companies normally resort to recruitment bans. Uusally this means the best people leave and aren’t replaced; while low performers are retained. The result is a gross misallocation of resources.

• FOMO, herd mentality, chasing growth

There’s always a reason to spend money.

It might be a new piece of machinery or technology that promises greater efficiencies (like AI). It might be an enticing acquisition. Or it might be the notion that if only the marketing budget was a bit higher, sales would go through the roof.

Often these investments are made largely because other companies are making them. Often they’re made out of fear of being left behind. And often they’re made because companies enjoy seeing top line growth, regardless of whether it creates shareholder value (measured by cash return on investment).

This makes it easy for companies to justify - to investors and themselves - wasting money, all in the name of ‘investment’.

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• Frugality is hard

Perhaps the biggest reason frugality is so rare is because it’s so damn hard.

It requires relentless focus, discipline, and - at times - ruthlessness.

It requires unusual independence to say - ‘I know everyone else is investing in this thing, but we’re not convinced it’s a good use of our scarce resources.’

It requires a willingness to look out of touch and be called a cheapskate.

It requires a much greater level of judgement to separate the 5% of good investment projects from the wasteful 95%.

It requires a relentless bearing down on bureaucracy.

It requires constant explanations to regulators, customers and employees why your margins are rising and why this is a good thing.

It requires looking at every single expense every single minute of every single day and asking - is this necessary?

99% of companies don’t want to do this

It amuses me when I see statements like - ‘AI could lead to 30% cost savings’.

Perhaps it can. But, in my opinion, most companies could already reduce operating costs by 30% with little impact on their business. However, they choose not to.

You see this in moments of crisis.

When the proverbial hits the fan, companies magically find cost savings. However, only as a last resort, and even then only to a limited degree. As soon as conditions normalise, they quickly return to spending lots of money.

This suggests to me that even if AI could study your whole business and tell you every single expense to cut, most companies wouldn’t do it. Which means a frugal culture (providing it’s maintained) is one of the biggest and most sustainable competitive advantages I can think of.

So, how can investors identify frugal companies? What are the tell-tale signs? And which companies do I believe have especially frugal cultures? I explore all this in the next few sections (paywalled).

How to spot frugal businesses

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Normally, I nod in agreement to most things Terry Smith says, does or writes. This time, I’m left scratching my head.

Lots has already been written about the letter. My aim here is to bring one or two fresh perspectives, framed as a series of questions.

If I were an investor in Fundsmith (which I’m not), these are the questions I’d want answers to.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

Is an open-ended structure the right one?

The letter effectively reads like an essay on why investing in active, open-ended funds is a bad idea and no longer works.

The main problem, according to Terry Smith, is fund flows. He writes:

He then goes on to say:

I’ve run quality-focused, open-ended funds. And I agree there are drawbacks. When you’re performing well, money pours in. When you aren’t, it rushes out. This isn’t easy to deal with. But it comes with the territory of managing open-ended funds and everyone knows that.

If you own illiquid businesses, open-ended funds and large outflows can be lethal, as we saw with Neil Woodford’s fund. Woodford couldn’t sell his unquoted holdings to meet redemptions, meaning their weightings rose to very high levels (and he was eventually forced to close the fund).

Fundsmith shouldn’t have this problem. It has sensibly stuck to large, highly liquid positions. As such, I don’t really understand what Terry Smith’s problem is from a portfolio management perspective.

As a portfolio manager, you choose the companies you want to invest in and the weightings. You then rebalance the portfolio according to inflows or outflows. If you get inflows you buy more of each company. With outflows you sell to fund redemptions. When those inflows or outflows are large, you have to rebalance more regularly; probably daily. As long as positions are liquid, this shouldn’t be an issue.

Put simply, I struggle to see why large outflows should necessitate a change to the investment approach.

If large outflows are a problem now, why weren’t large inflows an issue when the fund was performing well?

During the mid-to-late 2010s monthly fund inflows were c. £300m to £500m and this wasn’t deemed a problem (it did cause Fundsmith to move up the market cap spectrum which was sensible). Recent monthly outflows have admittedly been a bit bigger (averaging around £600m per month over the last year), but even so, this should be manageable.

I suspect the reason Terry Smith is so aggrieved has more to do with business considerations (lower fees) than investment ones. If so, he should be honest about that, rather than inventing other reasons.

What is the minimum viable size for Fundsmith?

Terry Smith appears to be worried about having to close the fund if outflows continue:

However, the fund spent almost three years at less than £1 billion in assets, and was viable.

In addition, Terry Smith is a very wealthy man and has a significant stake in Fundsmith, meaning he could presumably keep it open for as long as he wanted (and benefit from the eventual reckoning he believes is coming in financial markets).

The problem, as pointed out by in this very good article, is Fundsmith’s cost base appears to have inflated significantly along with the assets. However, I struggle to see why loyal investors in the fund should be the ones to suffer. Fundsmith has earned colossal fees since launch. Arguably, some of these fees could and should have been held back to get the fund through tougher times.

Fund management is - and always has been - a highly cyclical business. This shouldn’t be a problem as long as the business is managed prudently. If significant cost reductions are needed to keep the fund open, that’s what should happen, in my opinion. Not changing the investment approach.

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If the fund’s viability isn’t in doubt, why change the approach?

Terry Smith says:

This may be a wise move, especially in the current market. And it might improve returns. But I’d like to know - do they expect this change to enhance or detract from long-term investment performance? We aren’t told in the letter.

At some point, the market environment will change. And Terry Smith has said himself he expects things to end badly - he just doesn’t know when. Will Fundsmith be better or worse placed to navigate this market change after these changes to the portfolio (and why)?

If worse off, are they rewarding short-term investors at the expense of loyal, long-term ones?

Who is making the decisions at Fundsmith and what does the decision-making process look like?

Is it Terry Smith? Is it Julian Robins (Head of Research)? Is it someone else?

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Its data solutions are mission-critical. Its business model is diverse, resilient and enormously cash-generative. And its data sets are formidable, in my opinion. All of which has driven steady growth in revenues, profits and cashflows.

Yet, Experian’s shares - down a third in the last year - have rarely been so out of favour. What’s going on? And is this an opportunity?

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Experian.

A critical cog in the global economy

Experian’s roots can be traced back to 1826, when a group of London merchants began exchanging information on customers who failed to settle their debts. It was the beginnings of the world’s largest credit bureau.

The importance of the credit bureaus (Experian, Equifax and TransUnion) in today’s economy is hard to overstate.

By aggregating lending data, combining it with their own and third parties’ data, then selling it back to lenders, they enjoy a privileged and unique position. Their customers rely on this data every day to make decisions. Without them, banks wouldn’t be able to lend and the global economy would grind to a halt.

But Experian’s business has evolved into much more than selling credit reports to major banks.

It helps over 215 million consumers understand their financial position and take control of their finances. It helps businesses verify online purchases, combat fraud, automate decisions and acquire new customers. It even helps US hospitals manage payments. It does this in 32 countries, split across five major divisions:

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Under-estimated resilience

This diversity makes Experian a resilient business. In fact, the group has generated positive organic growth every year since its listing in October 2006; including during the 2008/09 financial crisis and Covid-19 pandemic:

Investors are often surprised by this. Many still view Experian as a play on lending volumes. And, of course, lending volumes matter. But, as I explained above, Experian is far from a one trick pony.

For a start, around half its revenue now comes from outside the financial sector. But even within the major banks, Experian’s data is used to support all manner of things, from preventing fraud to meeting regulatory requirements; which have little correlation to the credit cycle.

What’s more; in an economic downturn, the priority of lenders switches from assessing new customers to managing existing loans (especially quantifying the risk of bad loans). This means demand for some of Experian’s data solutions actually rises when credit conditions worsen.

Experian’s resilience is also helped by the 15% of its revenue that comes from Latin America (mainly Brazil). Brazil is a relatively closed economy and often performs very differently to the rest of the global economy. At the peak of the credit crunch, Experian’s Latin American business grew organic revenue by 18%.

To top it off, the business model is designed with resilience in mind.

A significant portion of Experian’s Business-to-Business (B2B) software and decisioning revenue comes from multi-year contracts, software licenses, and agreements with minimum data volume commitments. As a result, some $6.4 billion of its revenue is tied to non-cancellable long-term contracts; with around half expected to be recognised in FY27 (for context, Experian’s B2B revenue in FY26 was $6.2 billion). This lends significant repeatability and predictability to Experian’s revenue.

Experian’s business model is also very capital-light. About 30% of revenue converts into operating profit. And c. 90% of this profit converts into free cash flow. This makes Experian an enormously cash generative business - in good times and bad.

None of this makes it immune to the economic cycle - to be clear, some parts of the business will suffer when lending volumes turn down. But it does make it much more resilient than most businesses, in my opinion. And much more resilient than one might first assume.

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Point-solutions to platforms

Investors also tend to under-estimate just how much this business has evolved.

A decade ago, Experian was largely selling standalone point-solutions. Today, it sells platforms. Key to this transformation has been Ascend - Experian’s cloud-based unified data platform - launched in late 2017.

Ascend brings together all the elements banks need (data, analytics models, and essential tools like credit, identity and fraud prevention) under one roof; embedded directly into their workflows.

This means banks no longer need to buy data and software from a patchwork of vendors, wrestle with integrating them all, then spend countless hours building their own models from scratch. They can get everything they need from Experian, generating huge cost and time savings; as well as significantly reducing complexity and scope for manual errors.

Experian’s ability to provide integrated solutions in a single, easy-to-use, modular platform is unique in the credit bureau industry. When combined with the breadth and depth of its data solutions; it means its largest customers have little need to go elsewhere.

As Experian’s customers use more of its solutions, they become even less likely to consider alternatives. This ought to significantly strengthen switching costs; as well opening up meaningful upsell and cross-sell opportunities for the group.

Add it all up and I believe Experian’s competitive position has never been so strong.

Solid full-year results

Experian recently reported its results for the year ending 31 March 2026. They showed strong progress across the board:

The business also made good strategic progress.

The number of products available on the Ascend platform grew from 30 to 37. Revenue from new and scaling products (including Ascend) reached c. $2 billion, quadrupling in five years. And all major financial services clients whose agreements were up for renewal committed to longer, higher-value contracts.

Experian expects to build on this progress. In FY27 it’s targeting another year of double-digit Benchmark EPS growth, underpinned by total revenue growth of 8–11%, organic growth of 6–8%, and c. 50 basis points of margin expansion.

The elephant in the room

So, we have a business firing on most cylinders.

Admittedly, the economic environment could be lending more of a hand, but Experian is still growing nicely; while expanding margins.

Its business model is pretty formidable; and has proven itself in good times and bad. What’s more, its competitive position, if anything, appears to be strengthening.

And yet, Experian’s share price and valuation tells a very different story - the P/E has virtually halved from almost 40x a couple of years ago to well under 20x today.

The main reason? You guessed it - AI.

In the rest of this article (for paying subscribers), I discuss the AI threat to Experian’s business model; as well as the other major risks I see. I also give my views on Experian’s long-term growth prospects and valuation; and discuss what I plan to do with my own holding.

Opportunity? Or a trap?

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In theory, valuing businesses is simple. Intrinsic value is just the sum of future cash flows, discounted back to today.

In practice, it’s very difficult.

For a start, there are so many ways to value companies. Each has limitations. Each has nuances. And each can be dangerous in the wrong hands.

In this article I’ll examine some commonly used valuation methods, and their drawbacks. I’ll also tell you the methods and principles I use to value companies, and why.

I’ll conclude with a list of ten companies I believe look especially cheap right now; including brief commentary on each.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

P/E - simple, but wrong

The price to earnings ratio (P/E) is a quick, easy and convenient way of gauging the value of a company. It’s a useful tool, and one I use. But it should never be relied upon in isolation, and can only ever give a rough estimate of a company’s value. Sometimes, it can be very misleading.

The basic problem with P/E is it measures the wrong thing - earnings.

Profit isn’t cash. It’s an accounting term designed to approximate cash flow. Sometimes, that approximation is in the right ball park; and often it isn’t.

To make P/E useful we need to know how much of the earnings convert into cold, hard cash.

To understand that, we have to go deeper into a company’s accounts and ask questions like:

• What are the accounting assumptions?

• What are the working capital dynamics?

• What are the investment requirements and how does this compare to depreciation and amortisation?

Only then does the P/E become useful.

Cash conversion varies widely

Consider consumer goods giants, Diageo and Unilever. The chart below shows their free cash (FCF) conversion (free cash flow/adjusted net income) over the last four years:

Unilever’s cash conversion has been much better than Diageo’s over the last four years. On average it’s converted 88% of its adjusted net income into FCF, by my reckoning, which is pretty good.

By contrast, Diageo has converted only 63% of its adjusted earnings into FCF. Cash conversion has been held back by higher working capital requirements (e.g. a need for aged-spirits inventory) and high capital expenditures, which have significantly exceeded depreciation.

This matters, a lot.

Anyone relying on P/E alone to value Unilever vs. Diageo over the last four years has been comparing apples to oranges; and has been liable to draw the wrong conclusions.

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How to adjust for this

To make the P/E useful, we need to cash-adjust it. I‘ll now explain how I do this.

Let’s assume for the sake of argument Unilever and Diageo both trade on a P/E of 20 (in reality, both trade on lower P/Es; this is just an illustration). Let’s also assume we continue to expect Diageo’s cash conversion to average 63% and Unilever’s to average 88% (again, this is probably a wrong assumption).

We can now make the cash-adjustment.

Diageo’s cash-adjusted P/E = 20/0.63 = 31.7x

Unilever’s cash-adjusted P/E = 20/0.88 = 22.7x

And we can now make a much more accurate valuation comparison between the two businesses. In this illustrative example, Unilever’s valuation is significantly lower than Diageo’s on a cash-adjusted basis.

Why not just use FCF yield?

If cash is what matters rather than earnings, why not value businesses on their current free cash flow (FCF)?

The main drawback is that free cash flow can be very volatile.

You can see this in the chart above. In the last four years, Diageo’s cash conversion has ranged from 45% to 76%; while Unilever’s has ranged from 76% to 102%. This is because working capital movements, accounting adjustments and capital expenditures often vary widely from one year to the next. This is why it’s better to take the average cash conversion over an extended period, rather than rely on a single year’s figure.

But there’s something else we need to consider. When we value a company, we care about the future not the past.

While historical cash conversion is often a good guide to future cash conversion, in my experience (and it’s rare for poor cash generators to become good ones); this isn’t always the case.

For example, a company might be concluding a major investment programme which will see cash conversion materially improve. Or perhaps there’s new management targeting improvements in capital discipline and cash flow. In Diageo’s case, one could easily make this argument under new CEO, Dave Lewis.

So, the final step is to decide whether historical cash conversion is likely to be an accurate reflection of the future. If so, do nothing. If not, apply judgement and adjust.

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Now what?

Once we’ve understood the underlying cash conversion of a business and applied necessary adjustments, we still have the problem of how to value the business.

One method is to conduct a relative valuation - e.g. compare the valuation against the company’s own history, the market or industry peers (remembering to adjust for differing cash flow dynamics!).

This has its uses. But, personally, I’m not a big fan of relative valuation tools.

The trouble is - companies and market environments aren’t static. This can render comparison quite dangerous.

Diageo, for example, currently trades at a big discount to its ten-year average valuation. But prospects for the spirits industry have worsened and there are genuine question marks over future growth. In addition, interest rates are much higher than ten years ago. Higher interest rates mean higher discount rates and lower valuations, all else equal. So even a large valuation discount to the ten-year average doesn’t necessarily mean the shares are ‘cheap’.

In addition, even if a company is relatively cheap compared to the market or peers, it might still be over-valued in absolute terms. Just because Costco is on c. 45x earnings, it doesn’t mean I’m happy paying c. 40x for Walmart. And just because a company was trading at a discount to the market in 1999; it didn’t necessarily make it a good investment. You still probably lost money.

So, personally, I lean much more on absolute valuation metrics than relative ones.

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How I value businesses

Having discussed some of the limitations with traditional valuation approaches, I‘ll now discuss the methods I apply. There are many ways to skin a cat and I’m not suggesting this is the ‘right’ way. And, as you’ll see, there are drawbacks to my approach too.

The main tool I use to value businesses is a discounted cash flow (DCF) model.

To understand why, I return to what I said at the top of this article - the intrinsic value of any business is the sum of future cash flows, discounted back to today. To my mind, DCF models are the cleanest and purest way of weighing that cash flow.

There are three main inputs to my DCF model:

• Growth in free cash flow over 10 years

• Terminal growth (beyond 10 years), normally 2-3%

• Discount rate (the required rate of return)

So, with the following assumptions:

• Starting free cash flow of £1 million, growing at 10% for 10 years, and 2.5% thereafter, with an 8% discount rate…

The intrinsic value of a business is estimated at £33,467,067.

Which means if the company is currently valued at only £20 million, I can buy it at a 40.2% discount to its intrinsic value.

This is very precise & lovely, BUT…

DCF models rely very heavily on the assumptions used. If those assumptions are wrong, the estimate of a company’s worth will be very wrong too.

For example, if the company above grows at only 2.5% instead of 10% for ten years; its intrinsic value reduces by almost half, to £18,636,364.

The trouble is we don’t know what a company’s cash flows will be. Which means DCF models portray a level of accuracy and precision which exists only in excel; not in reality.

This doesn’t reduce their utility. But it’s critical to understand. And it means results should always be treated with a large grain of salt.

The most dangerous assumption in DCF models…

…is the terminal growth forecast.

It doesn’t really matter whether you use 2%, 2.5% or 3% as your terminal growth rate (beyond the 10 year forecast period) you’re still making an implicit assumption that these cash flows will continue forever and grow modestly over time.

For many businesses, this is a dangerous assumption. Yet, most of the value of most businesses lies in the distant future.

Let’s return to our first example.

• Starting free cash flow of £1 million, growing at 10% for 10 years, and 2.5% thereafter, with an 8% discount rate…

Recall, the intrinsic value of this business is estimated at £33,467,067.

Now let’s assume the cash flows end after ten years. How much is it worth?

The answer is £11,077,254.

In other words, almost 70% of this company’s value relies on cash flows that will be earned beyond year 10.

10 years is a long time

A lot can change in ten years to render a business less relevant. Technology and consumer tastes can shift dramatically. Competition can emerge from nowhere. Big economic downturns come along which can wipe companies out etc.

Just look at what’s happening with AI now. Investors are questioning the terminal growth rates of many data and software businesses; so valuations have taken a pummelling.

Put simply, it’s hard to have confidence in the terminal growth of most businesses. To my mind, this means most businesses can’t be valued using traditional DCF approaches.

This is why I prize durability and resilience above all else.

I want to own business that will still be thriving 10, 20 and 30 years from now; with relatively predictable cash flows. This means I can have at least a degree of confidence in the terminal growth rate. Which means I can value them using a traditional DCF model, and have a chance the answer won’t be a million miles away from reality.

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Exceptional businesses are usually under-valued

While DCF models arguably over-state the valuation of most businesses (by assuming c. 2.5% growth beyond year 10 forever), they often under-state the valuation of the exceptional few.

This is because exceptional businesses are capable of sustaining growth for much longer than DCF models imply.

In other words, instead of growing at 2.5% in perpetuity, they continue growing at higher rates for many years thereafter.

This changes the equation quite meaningfully.

Returning again to our original example but changing 10% growth for ten years, to 10% growth for 20 years:

• Starting free cash flow of £1 million, growing at 10% for 20 years, and 2.5% thereafter, with an 8% discount rate…

The intrinsic value is £51,284,743 (versus £33,467,067 before).

So, if you can find businesses capable of sustaining growth for longer (or, better still, accelerating their growth over time); you massively stack the odds in your favour.

And if you value them using a traditional DCF (10-year forecast horizon, 2.5% terminal growth) with fairly conservative assumptions; and you can buy them at a meaningful discount to this implied valuation; you introduce several layers of margin of safety.

This, in essence, is what I try to do.

Which 10 companies look cheap to me right now?

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Both have grown strongly for decades, fuelled by highly disciplined acquisitions. Both generate excellent margins and returns on capital. And both have created enormous value for shareholders. Please remember past performance isn't a guide to the future.

In many ways, they’re strikingly similar. And they even trade at similar valuations (c. 30x forward earnings). But they are also different in important ways.

This article will explore these nuances.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Diploma.

Key characteristics

On the surface, Halma and Diploma are quite different.

Halma is a product manufacturer, focused on the safety, environmental and healthcare industries. Its mission is to grow a safer, cleaner, and healthier future.

Diploma is mainly a value-added distributor, with three divisions - seals, controls and life sciences. Its end-markets range from aerospace and renewables to infrastructure, data centres and construction.

However, beneath the surface, there are more similarities than differences. Both companies:

• Target specialist niches where competition is limited and rational

• Provide value-add products and solutions that aren’t easily replicated, while avoiding commoditised end-markets

• Provide relatively low-cost, but critical solutions, with high cost of failure

• Are very capital light - Diploma is a middle-man, while Halma focuses on low volume, high-value assembly. Neither has requirement for heavy machinery.

• Are highly decentralised - each subsidiary has its own, empowered management; supported by a lean corporate centre.

These characteristics afford Halma and Diploma strong pricing power, high margins, excellent cash flow and healthy returns on capital. Their cultures - entrepreneurial, agile, down-to-earth - are also similar and have played a key part in their success.

Approach to acquisitions

Acquisitions have been pivotal for both companies. And, again, there are more similarities than differences in their approaches.

Both focus mainly on acquiring small to mid-sized businesses that fit into existing or adjacent areas of specialism. In most cases they’ve followed these businesses for years and already know them well.

Both seek to acquire high quality businesses. They aren’t looking for explosive growth that will fizzle out; or business ‘turnarounds’. Instead, they prize stability and durability of margins and cash flows.

Both do bolt-on deals, which are absorbed into existing operations; as well as acquisitions of stand-alone operating platforms; with management typically being retained in the latter case.

And crucially, both have made acquisitions a core part of their DNA.

They have well-trodden processes, honed over decades. And have forged excellent reputations for nurturing businesses and allowing them to flourish. Unlike private equity (where businesses are often passed around like hot potatoes), they can offer a permanent home. All of this makes them an appealing choice for business owners looking to sell.

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Organic growth

While Halma and Diploma are proven acquirers, their first priority is organic growth. In fact, both expect around half of their total revenue growth to come from existing businesses.

I’ll touch on the nuances and differences later. But suffice to say, organic growth has been a strong contributor to these companies’ performance; with both exposed to several structural growth drivers.

For Halma, this includes tightening safety and environmental regulations, an ageing population and the shift towards minimally invasive surgery. For Diploma, growing demand for aerospace components, infrastructure and renewable energy have all been key drivers. Both companies also have meaningful exposure to data centres, which is growing strongly right now. I’ll discuss this dynamic later.

As a result, in recent years, both companies have comfortably out-performed their organic growth aspirations; growing in the high-single-digit to mid-double-digit range:

Organic revenue growth

Key differences and nuances

Having focused largely on the similarities between these two businesses, I’ll now turn my attention to how they differ.

Some of these differences are quite minor - others are much more meaningful. Some don’t really matter - but they’re well worth knowing. Others arguably matter much more and could easily sway the decision of which business to own for the next decade.

I‘ll discuss Halma vs. Diploma’s:

• Resilience to economic shocks

• Diversification and customer concentration; including Halma’s Photonics business

• Capital deployment and returns on acquisitions

• Key risks

• Major end markets, including data centre exposure

• Margins and their likely sustainability

I’ll conclude by discussing the valuation of each company and where I currently see the best opportunity.

These sections are for paying subscribers. A subscription is £25 per month or £195 for the whole year - a 35% discount.

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He once said:

“It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

So, how can investors be ‘not stupid’? Here’s my starter for ten…

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

1. Don’t invest in things you don’t understand

I try, as best I can, to avoid the complex and the esoteric. If I look at a company’s accounts and am left scratching my head, I pass.

A good example is Legal & General - I find its accounts impenetrable. It might be a great investment. The trouble is, I’d be guessing, and if anything went wrong, I wouldn’t have the foggiest what to do.

There are plenty of relatively simple businesses with simple accounts that don’t require a degree in rocket science to understand. Stick to those and you’ll reduce the chances of making dumb moves.

2. Avoid fragile balance sheets

I know, ‘fragile’ is rather vague. But I’m afraid every situation requires judgment.

For a highly cyclical, capital-intensive business, any amount of debt might be too much. For a very predictable one that gushes cash, leverage of 2-3x might not be a problem providing the debt is structured appropriately (e.g. long-term, staggered maturities to reduce refinancing risk, limited covenants etc.).

A good rule of thumb I use is to envisage a worst case scenario, then double it.

Would the company live to fight another day? Or would it be reliant on the kindness of strangers (bankers or equity holders) to get it out of trouble? If the latter, I’d rather steer clear.

3. Avoid speculation

Try to think of every share you own as a fractional interest in a real business (which it is), rather than a thing that bobs up and down a screen that can be traded at any moment.

It will save a huge amount of worry, and means you’ll probably make longer-term and more sensible investment decisions.

If you’re likely to need access to the money in the next couple of years, don’t invest in equities. Stick to cash or short-term bonds.

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4. Avoid companies with no control over their destiny

Every company has some things that aren’t in its control. But some companies are almost complete hostages to fortune.

If a company needs a certain thing to happen to survive, let alone thrive, I’d rather not invest. Think small biotech reliant on a single clinical trial, a miner that needs commodity prices to be above a certain level, or a company reliant on one customer for a large part of its revenues.

I want to own companies that are, as far as possible, in charge of their own destiny; meaning they can do well in a variety of scenarios rather than just the best case scenario.

5. If you have doubts about management, don’t invest

Sticking with businesses through difficult times is hard enough. But it’s especially difficult if you have no confidence in the management team.

When the proverbial hits the fan, well-earned conviction in the management and culture of a business can be the one thing that keeps you from panic selling or losing too much sleep.

Look for management teams with good track records of creating shareholder value, who do what they say they’ll do, and who are open and honest. Avoid the opposite like the plague.

6. Avoid business ‘turnarounds’

If a business has a track record of disappointing, nine times out of ten I’ve found it will continue doing so.

There are exceptions. Engine-manufacturer, Rolls Royce, under a different CEO, seems to have found a way of growing while actually generating cash (which it always seemed incapable of doing). But, remember, we’re trying to be ‘not stupid’, rather than seeking brilliance which means being willing to let these opportunities pass.

Turning around a failing business is extremely difficult. As Warren Buffett famously said:

I prefer to leave these situations to others.

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7. Avoid companies that can’t generate cash

Some companies struggle to generate cash. Technology start-ups (and, frankly, technology grown-ups lately!), construction firms operating on wafer thin margins, heavy manufacturers - the list goes on.

Call me old fashioned but I want businesses to pay me to own them, not the other way round.

I don’t necessarily need cash to come back to me as dividends or share buybacks - profitable reinvestment is great. But I do need to see positive free cash flow in any environment, and preferably growing cash flows over time.

8. Avoid looking at screens too much

I was constantly amazed when I worked as a fund manager how much of my colleagues’ time was spent staring at Bloomberg screens.

If you’re aiming to hold a business for the long-term, why do you need a constant barrage of market and economic updates? And why do you need to know what share prices are doing on an hourly or daily basis? You don’t, it will only encourage you to adopt a shorter-term perspective.

The intrinsic value of businesses changes much more slowly than share prices and news headlines. By limiting your exposure to screens, it will be much easier to stick to your investment process.

9. Avoid over-trading

It’s incredibly cheap and easy to trade online nowadays and we’re constantly encouraged to do so by trading apps and social media. It’s dangerous.

If in doubt, do nowt is quite good advice. I’ve also found sleeping on decisions before making them to be very helpful. The thing to avoid, above all, is knee-jerk reactions to market movements or economic headlines.

In fact, there’s a rule I try to follow which many investors will regard as foolish.

If a big event has occurred, like the Covid-19 pandemic, and the market is moving wildly, I sit on my hands. I don’t want to be placing trades in a heightened emotional state. I wait for my emotions to settle (which could be weeks or even months), and then decide what to do.

Does this mean I miss out on some opportunities? Almost certainly. But I think it also reduces the chance of making really dumb decisions. That’s a trade-off I’m willing to take.

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10. Above all, know yourself

As the saying goes - “If you don’t know who you are, the stock market is an expensive place to find out.”

Everyone is wired differently. Some investors are quick thinkers. Some are astute at chasing momentum. Some are serial optimists who are very comfortable with risk. I know none of this applies to me.

Try to understand your own character as much as possible, and adopt an investment strategy that aligns with it.

I’ve said this before but it bears repeating. There is no universal right or wrong way to invest. Only a right or wrong way for you. Try to learn the difference.

A quick story

When I started out investing, I didn’t have a clue what I was doing. I’d buy shares I thought looked ‘cheap’. They’d often go down and I wouldn’t know what to do.

One day, something struck me. All my investments had a common theme. I was more attracted to the stock than the business. In other words, I liked the price more than the business itself.

So, I inverted my thinking. I started to look for businesses I really liked, with valuation a secondary consideration. This had two consequences. I started buying better businesses. I also had much more conviction to hold them through the market’s tantrums. I never looked back.

Nowadays, before making any investment decision I always ask - am I more attracted to the stock than the business? If yes, red lights start flashing (I might still do it, but only in certain circumstances).

I still make plenty of mistakes. The difference now is I tend to know why I’ve made them, and have sound investment principles to fall back on in response, rather than just - “I thought this was quite cheap.”

Anyway, that’s enough from me. If you enjoyed this article I‘d really appreciate it if you could spread the word. Thanks for reading.

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But the business has stood the test of time. It’s one of the best operators in its industry, in my opinion. And it generates lots of cash - with a current free cash flow yield of over 10%.

Yet nobody cares about it.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

Revenue is vanity, profit is sanity, but cash is king

You wouldn’t know it in the current market, but revenue and profit don’t actually matter. In the end the only thing that counts is cash.

The value of any business is just the sum of its future cash flows, discounted back to today.

The higher today’s cash flows, the less growth the company requires to justify its valuation.

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The trouble is…

…Companies offering high free cash flow yields are often cheap for a reason.

The business might be in terminal decline. It might have too much debt. It might operate in a geo-politically fraught jurisdiction meaning the cash flows could disappear at a moment’s notice.

But not always.

Sometimes companies can get overlooked, simply because they’re perceived to be boring. Or because they’ve come through a tough period and investors are extrapolating the recent past. Or because they operate in an industry that’s disliked. Or because the shares are quite illiquid.

In fact, with AI absorbing all investors’ attention; I‘m finding quite a lot of these opportunities right now.

The company I’ll highlight today ticks all these boxes.

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Will the cash keep rolling?

The most important consideration for companies like this is whether the cash flow is sustainable.

I think it is in this case.

The company has been around for almost 200 years and is still going strong. The industry is really tough, but I think this company offers something different, and is a very good operator to boot.

There is little risk of technological obsolescence, whether from AI or anything else. That matters right now.

And although the pandemic wasn’t kind, and growth has been hard to come by in recent years, that’s now changing. Business prospects are improving, with mid-single-digit profit growth a realistic prospect.

Yet the shares trade on under 10x earnings.

What’s the company?

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It’s a good summary of the current market environment. It’s by far the strangest - and most bifurcated - I’ve experienced.

On the one hand we have the ‘AI winners’. This includes the Large Language Models (LLMs) growing revenues (and losing money) hand over fist, attracting almost $1 trillion valuations; and the ‘picks and shovels’ AI hardware, infrastructure, and energy players supporting the AI gold rush.

At the other end of the spectrum are a huge swathe of ‘AI losers’, including many software and data businesses. A couple of years ago, these were market darlings, celebrated for their almost impenetrable moats.

Then there are companies that used to be ‘AI losers’ now being deemed ‘AI winners’ - like Alphabet. And companies that were pretty much guaranteed to be ‘AI winners’, which are now ‘AI losers’ - like Microsoft and Meta.

Investors are celebrating AI spending for the benefits it brings to the picks and shovels companies. And at the same time they’re questioning the sustainability of returns from the colossal sums being spent by the ‘Magnificent 7’ on AI cloud infrastructure.

Confused? I certainly am.

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Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

A great/awful time to invest

If you’re on the right side of this AI trade - you’re making tonnes of money. And if you’re not, you’re a ‘fool and completely out of touch’ - like Terry Smith and Nick Train.

If you’ve decided to sit out the AI trade - avoiding perceived ‘winners’ and ‘losers’ - you’re still probably under-performing because most stocks in these categories - like consumer goods and healthcare - have massively lagged the indexes.

If you’ve been caught in ‘winners’ that became ‘losers’ or have tried to trade your way in and out of these stocks on every headline; you’ve probably done worse still.

And if you decided to play it safe by owning cash (or government bonds), you’ve seen the real value of your wealth steadily eroded, meaning your worse off than before you started.

In summary, for anyone other than firm AI believers, it’s been - for the most part - a horrible market set-up.

AI bubble?

I view AI as a transformative technology, just like everyone else. I’m also convinced we’re in an AI bubble.

I’ve said it before and I’ll say it again - the current environment is very reminiscent of the late 1990’s.

Back then, everyone knew the internet was ‘transformative’, just like everyone today agrees AI is the future. And like today it was a very extreme, bifurcated market. You were either an internet ‘winner’ or a ‘loser’.

At times like these, the investing rule book goes out the window. Conventional metrics like return on capital, margins and cash flow no longer matter. What mattered in the late nineties were website hits and number of clicks. In the AI era, all that matters is model intelligence and not being left behind in the AI race.

Races always end eventually - but when?

The dot-com bubble officially popped on 10 March 2000, when the NASDAQ technology index peaked at 5,048. However, in the four years leading up to that point, the NASDAQ rose almost 5-fold!

Put simply, if you were on the right side of the tech trade back then, you made lots of money (at least initially). And if you were on the wrong side you got taken to the cleaners, while seeing your neighbours get rich.

Conventional investors at that time - including Warren Buffett - were written off as dinosaurs. By the time the tide finally turned and these investors were vindicated, many had already been given their P45.

How might investors navigate this environment?

Stock market bubbles can be incredibly rewarding, but also extremely dangerous.

They can last much longer than anyone thinks. They can suck you in at just the wrong moment, and spit you out when you’re least expecting it. They can make idiots look like geniuses, and vice versa. They can very easily ruin careers. And leave psychological scars that never go away.

I don’t know this story plays out. But I do know one thing - bubbles magnify risk.

The biggest investing risk isn’t what the economy, interest rates or Trump might do. It’s you. Bubbles put every human emotion - from greed to envy to fear - on steroids. And emotions are the biggest risk to investment returns.

So, how can investors best prepare and position themselves?

In the next few sections I discuss how I’m navigating this difficult and confusing time. I give my thoughts on the ‘AI bubble’ - and when it might end. I discuss what I’m doing with my own portfolio and give some pointers for what to think about when managing your own. And I discuss the tools and principles I‘m applying to help me survive this period, and hopefully emerge stronger.

These sections are for paying subscribers. A subscription is £25 per month or £195 for the whole year - a 35% discount.

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It doesn’t get much more niche or specialist. It never makes headlines. There is no AI angle, or other reason to get excited. It just quietly goes about its business.

The company offers an attractive and growing yield. It has an excellent long-term track record. And it’s backed by a highly experienced team.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

Attractive yield

It’s always risky to chase high yields. They usually come with high risks and/or limited growth prospects, in my experience. As soon as the environment sours, a dividend cut can easily be on the cards.

This company is different, in my opinion.

It currently yields around 7% (variable and not guaranteed). It has grown its dividend every year for decades, well above inflation. And it has excellent visibility over future cash flows, giving it every chance of continuing this fine track record.

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Strong management team

A key part of the company’s success is down to its long-standing management team.

They are proven operators, with extensive knowledge and industry relationships. They run the company with an agility often lacking in their larger peers. They think independently. They are opportunistic. And they are proactive rather than reactive.

This has allowed them to adapt to changing conditions. As a result, the quality of the company’s assets has steadily improved and has arguably never been higher.

Management are also very shareholder-friendly and have plenty of skin in the game. I trust them to do the right thing for shareholders.

Conservative and sensible

The company operates in a sector where balance sheets can often get you into trouble.

However, this company has structured its balance sheet sensibly and conservatively, in my opinion, with minimal refinancing risk over the next few years.

It chimes with how the rest of the business is run. Management don’t chase growth for the sake of it. They prioritise security of income, in good times and bad. They embody a principle many others fail to grasp - if you look after the downside, the upside tends to look after itself.

Only available to private investors

The company’s shares are illiquid, which means fund managers can’t own it. It favours patient accumulation. This is one of the advantages private investors have - they can go where professionals often can’t.

I view it as a useful portfolio diversifier, as well as a valuable source of income. It’s a core holding for me. And I expect it to remain so for the foreseeable future.

The rest of this article is for paying subscribers. A subscription is £25 per month or £195 for the whole year - a 35% discount.

What’s the company?

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CSI held its annual general meeting (AGM) on 15 May. It was crammed with insights, with management spending four hours fielding questions. Unsurprisingly, AI dominated the discussion.

So, what stood out to me?

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Topicus which was spun off from Constellation Software in 2021.

My AGM thoughts

Paraphrased quotes from the AGM are in bold italics with my thoughts below.

• We are using AI to rethink and reimagine what we do

CSI is tackling the AI threat head on - changing the way it operates, immersing itself in best practices, sharing learnings and being willing to disrupt itself, rather than just tweaking things here or there.

It’s also relying on its decentralised culture to assess AI impacts on a business-by-business basis, rather than parachuting in outside experts or adopting a centralised AI strategy. This ought to reduce the risk of jumping on bandwagons while increasing the chance that AI will be used to solve genuine customer problems.

The seriousness with which CSI’s management are taking AI reinforces to me that it’s a genuine long-term risk to the industry. On the one hand this is concerning. On the other, it’s reassuring, because paranoid companies that embrace technological change are usually the ones that survive and prosper.

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• We're so close to our customers and some of them have been with us for decades

Long-term, trusted customer relationships are crucial for navigating big changes. CSI has this is spades. It understands its customers’ problems and pain points better than anyone else, because it has built and refined those systems over decades.

So, when customers have a problem, they come to CSI first. They invite it in to discuss how it can help them and they trust what it tells them. It means CSI’s businesses typically get the first shot at solving customer issues.

These long-term customer relationships are one CSI’s biggest defences against AI threats. CSI has earned its customers’ trust and a seat at the table. Other companies - no matter how good their AI solutions - haven’t, because they don’t have decades of history operating in these markets to fall back on.

• We very rarely lose business to cheaper competitors… the main way we lose customers is if competition has some functionality we lack

CSI’s customers need a very good reason to endure the pain of switching software providers. Cost is rarely that reason.

The main reason customers switch is if there’s some functionality lacking they desperately need or want. It suggests cheaper AI-native competitors will struggle to gain traction, unless they can offer something meaningfully better.

Given that CSI is always learning from competitors and copying the best of them, this won’t be an easy task.

• Selling hasn't changed… you still have to get in front of new customers and convince them… it’s incredibly difficult.

There’s one thing AI hasn’t changed - the difficulty of selling software to new customers.

A lot of CSI’s customers are inherently conservative because they operate in regulated and/or government-backed industries, where the cost of failure is high (e.g. healthcare systems). They’re also very reluctant to change workflows and user interfaces if they can avoid it. This makes it an even harder sell.

Although AI tools have significantly reduced the time to develop software, government procurement cycles have gone in the opposite direction. And ultimately, it’s the speed of customer decision-making that dictates when software gets adopted, not development cycles.

This is backed up by CSI’s own experience. In the past, it’s built many products that “made a tonne of sense”, but traction with customers was very disappointing. It suggests that if AI solutions are to be adopted in CSI’s niches, it will probably take a lot longer than most currently imagine.

• We haven't really seen any AI-specific attrition to date…we haven’t seen examples of customers developing their own software either.. but nor have we seen much new revenue from AI

The slow-moving, conservative nature of CSI’s customers means we should be cautious about reading too much into what’s happening right now.

It will take time before new threats and opportunities show up. Investors should not be reassured by the current limited impact from AI-native competition. But nor should they be overly concerned about the apparent lack of revenue acceleration from AI initiatives.

The only thing that will solve this is time. And it will probably be several years before more clarity emerges. In the meantime, expect lots of uncertainty and investor posturing and probably a lot of volatility in CSI’s stock price.

• We are evaluating the return on AI investments very closely

Most companies don’t seem to care about returns on AI spending - because ‘AI is the future’. For CSI, everything comes back to returns on investment (ROI).

History suggests that in the midst of transformative technological change, enormous amounts of shareholder capital tends to get destroyed. At times like these, it’s even more important to entrust money to a great capital allocator that acts wisely, rationally and in the long-term interests of owners.

CSI passes this test with flying colours, in my opinion, and the AGM reinforced this on multiple occasions.

• We have a large backlog of customer projects that didn't used to make sense from a returns perspective, but now do… there's so much more we can do for existing customers

Software development timelines have massively shrunk - what used to take months now takes days or even hours with AI tools. This means CSI can do much more for its customers, much quicker than ever before.

Every CSI business has a huge backlog of customer requests; many of them bespoke or only pertaining to a few customers. Previously, the software development costs of these projects couldn’t be justified. But AI efficiencies have turned the tables.

Whether CSI can capture the increased value it provides, or whether it will be competed away, remains to be seen. But it appears to be a big opportunity. And the excitement within the organisation is palpable.

• Poor businesses remain poor businesses - this is where the biggest AI threats lie

CSI’s portfolio is a broad church. Most of its businesses have some degree of mission criticality and low customer attrition. But some sell less critical applications, where switching costs are lower and customer attrition rates are much higher.

Unsurprisingly, these lower quality businesses are seen by management as having the greatest AI-disruption risk.

Perhaps AI will hasten the demise of these weaker businesses, while making strong businesses stronger? If so, CSI should be reasonably well positioned, given these lower quality businesses account for a minority of its portfolio.

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• For every potential acquisition we are looking at AI vulnerability…and defensibility

CSI assesses AI-disruption risk for every business it acquires and is unlikely to acquire anything where it sees a major threat (unless the price was exceptionally attractive). Given that Q1 2026 was one of its best ever for capital deployment, it doesn’t imply it’s overly worried.

Its database of acquisition targets is still huge and growing, with new start-ups emerging all the time. And it still believes returns on M&A are “far higher” than buying back stock, despite the recent share price performance.

In fact, reading between the lines, CSI seems to think AI-disruption fears could lead to more capital deployment opportunities. Over the last decade, a number of CSI ‘copycats’ have emerged. With everything that’s going on, some of these might decide to throw in the towel - potentially allowing CSI to snap them up on the cheap.

• A ‘normal’ CEO couldn't run CSI

Constellation Software’s culture is unique and this was reinforced again and again at the AGM.

Its leaders think in the opposite way to most companies. They are incredibly rational and returns-focused. They think and act long-term. They are constantly sharing learnings. They guard CSI’s decentralised culture jealously, avoiding bureaucracy like the plague. And they are frugal, low-ego individuals who are incentivised through their shareholdings to create enduring value for owners.

None of this insulates CSI from AI disruption. But, put it this way, I‘d be a lot more worried for its future if the opposite culture applied.

Final thoughts

I’m pretty sure AI-disruption fears won’t go away after this AGM. This will probably require concrete proof of AI’s impacts or a large shift in market narrative away from the current AI hype. In the meantime, investors will need a stomach for extreme volatility.

That said, Constellation Software seems to be doing all the right things. And its culture gives it as good a chance as any of navigating this transition successfully, in my opinion. This is what ultimately matters for long-term owners of CSI and its spin-offs (Topicus and Lumine).

CSI’s business model also buys management time, with customer intimacy and switching costs significantly raising the bar for new entrants. Again, it doesn’t mean significant disruption can’t happen. But it does likely lengthen the odds.

Thanks for reading.

It’s profoundly dull - never offering an exciting story or explosive growth. It just quietly compounds profits and cash flows, using a tried and tested approach.

Its long-term track record is anything but boring. Twenty years ago the shares changed hands for about $14. Today, the share price stands at $228.

The question is - can it build on this impressive track record?

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future. I own shares in Ametek.

What does Ametek do?

Ametek makes highly engineered products for a range of end-markets, including aerospace & defence, power, healthcare, process and industrial automation.

It’s exceptionally diverse, with around 40 business units in more than 30 countries, organised into two main groups - the electronic instruments Group (EIG) and the electromechanical group (EMG). Each business holds a market-leading position within its niche (typically number 1 or 2).

Ametek has been built up steadily through acquisition. And like many serial acquirers it has a decentralised operating structure - each business operates independently, with its own management and profit and loss account.

Unlike many serial acquirers, however, Ametek has managed to sustain strong returns over decades. Key to this has been its ability to harness the benefits of scale, while retaining the scrappiness, agility and entrepreneurialism of a smaller entity.

The results speak for themselves.

A superb track record

Ametek is the definition of a long-term, quality compounder. The consistency of its performance, despite operating in some cyclical end-markets, has been particularly impressive:

Its operating margins were 26% in 2025, and have trended steadily upwards:

The business has generated cash like no tomorrow, with free cash flow averaging 95% of adjusted net income in the last five years.

This cash has provided fuel for acquisitions, with 15 new businesses joining in the last five years alone; adding annualised sales of approximately $1.8 billion. The success of this acquisition strategy is illustrated by Ametek’s consistently strong, mid-teens returns on capital employed; and the fact it’s never incurred a goodwill impairment.

All of which has translated into rich rewards for shareholders.

Over the last two decades, Ametek has delivered a total shareholder return of 18%; nearly double that of the S&P 500. Please remember past performance isn’t a guide to the future.

How has Ametek achieved this?

First and foremost, it owns good businesses.

Ametek avoids operating in large, commoditised, undifferentiated markets. Instead, it targets highly specialised industrial niches, supplying technologically differentiated solutions.

The small, technical - and often highly regulated - nature of these markets affords strong barriers to entry. This helps keep a lid on competition meaning Ametek is typically only competing with a handful of players in each market.

The products Ametek supplies are usually sub-components of larger systems. Their cost is small in the grand scheme of things, but they’re a critical part of the end application.

For example, the group supplies precision temperature and pressure sensors for aerospace engine monitoring. These sensors provide real-time data on engine performance, ensuring safety, efficiency, and reliability. Put simply, they can’t fail.

As a result, Ametek’s customers are a conservative bunch. They tend to stick with what they know and are unlikely to entertain unproven suppliers just to save a few bob. This means switching costs are quite high and market share within these niches tends to move slowly.

All of which affords Ametek excellent pricing power. This has allowed it to consistently increase prices above cost inflation - even in the last five years when inflation exploded higher.

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A fantastic operator

There are plenty of specialist industrial conglomerates that haven’t achieved results anywhere near as good as Ametek. What might explain this?

Well, Ametek isn’t just a shrewd buyer of businesses - it also runs them brilliantly well, in my opinion. It has made operational excellence a core part of its DNA.

This allows it to acquire businesses and extract much more value from them. And to earn much better margins than comparable companies. It also allows it to maximise the advantages its business model affords.

What is operational excellence?

Let’s start with what it isn’t.

Operational excellence has nothing to do with strategy or management presentations. It does not involve sitting in meetings and discussing what you plan to do until the cows come home. This is the antithesis of what it means.

The best operators excel at getting stuff done.

In my experience, they’re characterised by a ‘roll your sleeves up’ culture where everyone mucks in (plow horses not show horses). They know what adds value to the business, and - more importantly - what doesn’t (allocating time and resources accordingly). They’re fanatical about eliminating waste and cost. They’re disciplined, thorough, meticulous and often ruthless. And they’re never satisfied, always searching for incremental improvements.

In my opinion, Ametek embodies all of these principles.

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It starts with costs

Ametek has a laser focus on costs that most companies frankly lack.

After acquiring a business the first thing it does is streamline or remove functions that aren’t adding value. This sees margins immediately rise.

It also leverages its global scale.

Ametek is a large business, generating over $7 billion of sales. By combining purchasing power across each of its operating companies, it can generate significant procurement savings (20-30%) on materials and components.

Another huge source of cost savings is its global manufacturing footprint.

Ametek has manufacturing facilities in several low-cost countries, including Mexico, Serbia and Malaysia. After acquiring a business, it will take a long, hard look at the manufacturing footprint. It will then seek to optimise it, often merging or consolidating facilities into existing sites.

Ametek applies the same surgical lens to all back office functions of a business, from finance to HR and logistics; leveraging the group’s scale to maximise efficiency.

Extensive operational toolkit

Ametek doesn’t just rely on its size for efficiency gains. It provides extensive coaching and resources for business leaders to take their performance to the next level.

It employs centralised teams specialising in things like lean operations and supply chain management, which go into group companies and provide comprehensive audits of their business practices. This helps them to see where they can make improvements. Ametek will then provide personnel and resources to help make that happen.

It’s not about baby-sitting or handholding. Every leader in Ametek is empowered to run their business. But they’re also held to account. If their performance falls short of expectations, Ametek is not shy about enforcing change.

Nowhere to hide

Ametek tracks the performance of its businesses weekly and has rigorous budgets and targets, which are quickly updated in response to changes in the external environment. This has allowed it to navigate things like tariffs, component shortages, cost increases and major economic downturns with aplomb - emerging stronger each time.

Ametek applies the same discipline to businesses it acquires, with integration teams responsible for wringing out costs and improving operations. All metrics are very closely tracked to ensure the intended improvement is coming through.

In summary, Ametek has an iron grip on the financials of every business it owns. It knows exactly how much profit and cash each one is throwing off at any given moment, and whether each is on track to hit its targets. If sales start to fall short of what’s expected, more cost must come out to protect profit.

Importantly, this cost focus does not seem to impede new product development. It may even enhance it by ensuring only the best projects are prioritised. Research, development and engineering investment is a healthy ~5.5% of sales. And Ametek’s vitality index (sales derived from products launched within the last three years) is around 30%, which is quite impressive.

If there is a downside to this culture - that prioritises shareholders above all else - it’s probably pressure. In a sink or swim environment, where expectations are so high and the pursuit of improvement so relentless; I suspect a lot of people burn out.

Every culture comes with drawbacks, and for every strength there is often a corresponding weakness. But from a shareholder perspective, it’s hard to argue with the results.

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1 + 1 = 3

Ametek’s global scale and operational discipline typically allows it to raise margins of acquired businesses by 10-12 percentage points, in as little as two to three years. It’s an enormous benefit not available to most other conglomerates.

What’s more, Ametek usually acquires companies operating in the same or adjacent markets. This provides scope for collaboration and cross-sell. Acquired businesses also gain access to Ametek’s extensive global sales teams and infrastructure, providing access to new territories, markets and customers. All of this helps to accelerate growth.

And it all up and and it means businesses are worth much more once absorbed into the Ametek machine than they were before.

Can the compounding continue?

Ametek has clearly been enormously successful. But the question is - can it continue to be so?

Capitalised at c. $53 billion, it’s now a huge business. And it faces the same issue all serial acquirers eventually bump up against - how to scale capital deployment.

To continue increasing profits at the same rate, it must acquire more businesses or bigger ones. The latter is the easier option, but larger businesses tend to carry much heftier price tags, which can impede returns. This is the route Ametek has chosen. Its latest deal - the proposed acquisition of Indicor, for $5 billion - is a prime example.

In addition, Ametek’s business performance hasn’t gone unnoticed, meaning the shares don’t come cheap. No business, no matter how good, is worth any price. Does a P/E of almost 30x leave enough juice in the tank for shareholders?

I discuss all this, and what it might for investors - as well as the key risks - in the next few sections (paywalled). A subscription is £25 per month or £195 for the whole year - a 35% discount.

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It’s such a tough industry. And government tax hikes have made it even tougher. It’s not surprising Whitbread has struggled.

However, the brand remains well-liked by customers, investor sentiment is weak and a new strategic review has been announced, alongside full-year results.

It’s not a bad time to check-in to the story.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

Running hotels is hard

It isn’t easy to make decent returns managing hotels, to put it mildly.

Hotel stays are a ‘nice-to-have’ rather than ‘must have’ spending category for most people, meaning it’s one of the first things they cut back on in difficult times.

Competition is fierce. Not just from other branded hotel chains, but independents, B&Bs, Airbnb, glamping etc.

For a lot of people, this is a lifestyle business. Someone renting out an Airbnb isn’t necessarily trying to optimise returns. They might just want to cover the bills. And there are many independent hotel chains and B&Bs where the maths only works because they’re family-run and prepared to work a 70-hour week.

Moreover, online travel agencies like Booking.com provide a shop window for these smaller outfits that was previously lacking. This has further increased competition and pricing transparency.

Then there are the costs…

Labour, rents (if the building is leased), utilities, marketing, taxes etc. all hoover up money. Running hotels also consumes large amounts of capital (unless you’re a franchised operator like Marriott, Hilton or IHG). Buildings constantly need to be maintained and repaired. Furnishings, bedding etc. must be frequently refreshed.

A lot of these costs are fixed - they’re incurred whether the building is full or half-empty, which is why hotels move heaven and earth to fill rooms. And, as we know, costs have been going in only one direction - up.

The National Living Wage has risen over 50% since 2019/20 and has been compounded by recent increases to business rates and employee taxes. Utility costs are much higher than pre-pandemic and rents have also been rising. The hospitality sector has bore the brunt, and the lack of pricing power has made it extremely difficult to fully offset these costs.

The result? Pressure on margins and returns.

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Whitbread does it very well

Despite all these challenges, and the recent share price performance, Premier Inn is a success story.

The brand is almost 40 years old, so has stood the test of time. And it makes decent money, generating pre-tax profit (PBT) margins of 16.5%, returns on capital employed of 11% and strong cash flow.

It has succeeded in this industry, where so many others have failed, because it has certain advantages other lack. The first is scale.

Premier Inn is the UK's largest and best-known hotel brand, with a 12% share, almost twice that of its nearest competitor (Travelodge). It’s also vertically integrated, meaning it does everything itself - from running the hotels to sourcing and managing the properties to marketing etc.

This means it benefits from significant economies of scale and fixed costs can be spread over a larger base of revenues. It can access the best properties in the best locations. It also benefits from direct customer relationships, with around 90% of bookings coming through its own websites. This leads to much less reliance on expensive third-parties (like Booking.com) and lower marketing costs than peers.

Most importantly, Premier Inn offers a very good guest experience.

I’ve stayed in many Premier Inns and have never had a bad experience. You know exactly what you're getting, it’s comfortable (pretty key for a hotel) and their rooms are reasonably priced. I’d choose it any day of the week over Travelodge, even if the latter was cheaper.

I ‘m not alone in thinking this. Premier Inn is well-liked by its customers. This allows it to charge a premium versus other midscale and economy operators, while achieving better occupancy.

If nothing else, it suggests to me that Whitbread will retain relevance.

But can it grow?

Unfortunately, when you combine a strong operator with a rubbish industry, it’s often the industry that ‘wins’ rather than the company’s own actions, especially when those industry challenges are worsening.

Whitbread’s results for the year ending 26 February 2026 (released on 30 April) bear this out.

Despite out-performing the industry on total accommodation sales and RevPAR (Revenue Per Available Room) growth, and despite achieving £83 million of cost efficiencies - both revenues and profits were flat.

The relentless cost pressures show no sign of easing and this is reflected in the group’s guidance for the year ahead.

Whitbread expects cost inflation to be at the top end of its previously guided range of 6.5% - 7.5% on its £1.7bn UK cost base; including £35m of extra costs from business rates (announced in the Autumn Budget). Even after £60 million of cost efficiencies, net inflation is anticipated at around 4%.

Without a meaningful acceleration in like-for-like sales, this suggests profits will fall in the year ahead (FY27).

Patience from investors wearing thin

Pressure on Whitbread’s management has been building.

In December 2025 US activist, Corvex Management, disclosed a 6% stake in Whitbread, calling for a review of capital allocation and strategic direction.

In response, management have torn up the previous five-year plan (announced in October 2024) which was more geared towards growth, and come up with a new cunning plan; that puts margins, returns and cash flow front-and-centre.

In a nutshell, this entails:

• Exiting all remaining branded restaurants by extending the Accelerating Growth Plan (AGP)

• Reducing capital expenditure and prioritising returns on capital

• Crystallising value from freehold properties, reducing the proportion held from c.50% today to 30%-40%

• An even greater focus on cost efficiencies - with £250m of cost savings targeted over five years

• Making the German business more profitable and cash generative

This, in theory, should result in:

• Incremental profits of £275m by FY31

• Meaningfully improved margins and returns on capital

• Over £2 billion of cumulative free cash flow (over 50% of the current market capitalisation) coming back to shareholders via dividends and share buybacks

Does it make sense?

Let’s go through the key elements of the plan, starting with the AGP. Exiting all remaining branded restaurants is a no-brainer as far as I’m concerned.

I doubt anyone stays in a Premier Inn to visit a Beefeater or Brewers Fayre, so the impact on customers is minimal at best (and may be positive if someone like Wetherspoons takes on some of these sites). Replacing them with an integrated food and drink offer inside hotels will create a simpler, more efficient and higher-margin business. It will also unlock space for 3,000 room extensions, which are a much cheaper way to add capacity than building new hotels.

These actions will reduce profit by £40 million in FY27. And the total cost to deliver the plan will rise to c.£660m from c.£500m previously. But, overall, it seems a price worth paying given the long-term benefits, with c. £100 million of incremental profit expected by FY31.

The group continues to target 8,000 new rooms over the next five years through network expansion. However, it now also plans to exit around 1,500 lower returning rooms. Overall, these actions are expected to generate an additional £110 million of adjusted PBT, at lower capital cost compared to the previous plan. Again, this seems sensible.

Whitbread’s German business has been a money pit.

Over the last decade it’s invested over £1 billion in this business, and it’s only just turned a profit (a measly £2m PBT in FY26). The new plan sees Whitbread slightly scaling back its German growth ambitions, targeting 18,000 additional rooms (instead of 20,000), with more growth funded through freehold recycling or new leaseholds. As a result, the German business is forecast to turn cash flow positive in FY29 and deliver incremental PBT of £65 million by 2031.

Arguably, this part of the plan doesn’t go far enough. That said, having laid the groundwork in Germany, it probably makes little sense to walk away now. And there is potential for this business to be sold further down the line.

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Selling properties to free up cash

This is the most interesting part of the plan as far as I’m concerned.

Currently, 50% of Whitbread’s properties are owned freehold. This is a great strength, but also a rather inefficient use of capital - because it ties up money in bricks and mortar. By selling some of these properties and leasing them back, Whitbread can unlock tremendous amounts of cash; effectively reducing its net capital expenditure to £200-250 million per year (a reduction of over £1bn versus the previous plan).

To some investors, this might not go far enough, given 30-40% of properties will still be freehold by FY31. Others may argue that selling and leasing back properties is the wrong move entirely, adding fixed costs (in the form of lease payments), weakening the balance sheet and eroding Whitbread’s key strength - its vertical integration. I have sympathy for both sides. But I think this plan sounds pretty sensible, allowing plenty of capital to be released, while retaining Whitbread’s key strengths.

Whitbread’s scale, financial strength and long-term lease structure (c. 25-30 years) are attractive for property investors, meaning it can rent back properties relatively cheaply (Whitbread achieved an average initial yield of just 5.4% on sales and leasebacks in FY26). And although these rents will rise with inflation (usually linked to CPI), they are typically capped at 4%.

If Whitbread can reinvest at double-digit returns, it would seem to make sense to release cash in this manner. That said, it only works if it maintains a strong balance sheet, including an investment grade rating. This explains the 30-40% freehold mix target, enabling Whitbread to free up cash, without compromising balance sheet resilience.

Cash, cash, cash

Whitbread has always been very cash-generative. But in the past it’s reinvested far too much of this cash for my liking. It’s performance in FY26 is a case in point.

The group generated about £700 million of operating cash flow. But it spent virtually the same amount on capital expenditures (capex), mostly expansion projects. Even after deducting cash proceeds from sales and leasebacks, it meant net capex amounted to almost £400 million; and cash available for distribution to shareholders amounted to only c.£200 million.

Under the new plan, net capex will halve and free cash flow (after sales and leasebacks) should almost double to c. £350-400 million.

Once added to the incremental profits from the five-year plan, it suggests Whitbread’s aim to generate over £2bn of cash to return to shareholders is credible (note, share buybacks will be paused in FY27 as the group integrates its restaurants estate).

But…

As I said in my recent article, good investing is about embracing contradiction and nuance. And there’s plenty of it where Whitbread is concerned.

The new five-year plan seems sensible. But it doesn’t change the fact that Whitbread faces serious and growing challenges. The plan could succeed, but the shares could still turn out to be a bad investment.

The question is - given what we know about the industry, business and the five-year plan, does the current valuation offer enough juice in the tank for shareholders, with an adequate margin of safety on top?

In the next few sections, I seek to answer this critical question.

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I’ve made countless mistakes, and a few good decisions. I’ve invested through the 2008/09 financial crisis, Eurozone debt crisis and Covid-19 pandemic. I’ve documented pretty much everything.

These are the 20 biggest lessons I’ve learned.

Important: The content on this website is for information only. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Past performance is not a guide to the future.

1. The value of any asset is the discounted sum of its future cash flows

Valuing any cash-producing asset - like a bond, property or share - is simple. You just need to know the cash it will produce over its lifetime and your required return.

For a bond with a fixed life this is easy, because the coupons are fixed and you know when you’ll get your principal back.

An equity has no fixed life. And no fixed cash flows. So, there’s a large element of guesswork. But the principle is the same.

The value of any business is just the sum of its future cash flows, discounted back to today. Nothing else matters. Stock market narratives, politics, economics, share price movements - it’s mainly noise. The cash is what counts in the end. And it’s what all long-term investors should resolutely focus on.

2. Long-term thinking is rare

If you invest in an equity, you’re buying a stream of cash flows that will last decades (hopefully). This means, if you’re appraising business prospects, you also need to think in decades.

Most investors don’t.

They focus on what’s happening right now - market movements, prevailing narratives, quarterly results, current economics and politics etc. These things matter little, if at all, to long-term investors because they usually have little, if any, bearing on businesses’ long-term cash flows.

Most investors are momentum chasers. They’re playing a game of guessing which share prices will go up in the next 0-2 years. There is nothing wrong with this and some people do it well. But it’s a very crowded field. And it isn’t long-term investing.

3. Everything in investing is cyclical

Investing styles fall in and out of favour. Five years ago ‘Quality’ investing was all the rage and ‘Value’ investing was ‘dead’. In the last five years this has flipped on its head.

For about the first ten years of my investing life, everyone loved emerging markets and China. In the last ten years no one has wanted to touch them.

Banks were deeply unloved for years after the financial crisis. Suddenly, they are back in favour. Ten years ago, many consumer goods companies traded on mid-to-high twenties earnings multiples. Nowadays, it’s hard to find anyone with a good word to say about them.

Right now, the only thing investors care about is AI. In five or ten years it will be something else.

Everything in investing moves in cycles. Every time, investors mistake the temporary for the permanent and believe this time is different. It rarely is.

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4. Black or white, never grey

Investors love black and white narratives. AI will either transform every industry, or is massively over-hyped. This sector will be entirely disrupted or it’s totally immune. This way of valuing companies works and this one sucks.

It’s not the way the world or business works.

The business world is grey, nuanced, murky, contradictory. The internet didn’t kill every legacy business back in 1999. It impacted businesses to varying degrees (both positively and negatively), on differing time scales. And it was the ‘old economy’ stocks that out-performed when the tech bubble burst.

Avoiding extreme thinking and embracing subtlety, contradiction and nuance is crucial for investors. But it’s hard because it goes against human nature.

5. The growth of an industry doesn’t matter

As usual, Warren Buffett (Fortune Magazine, 1999) says it best:

Asking how transformative a technology will be is the wrong question. The key is understanding competitive dynamics, and how these might change.

Why? Because it doesn’t matter how much an industry grows if a competitor comes along and eats your lunch.

Despite this, many investors focus much more on industry growth rates than competitive advantages.

6. The best investors think in probabilities

Investors never have all the information they ‘need’ to make investment decisions. And even if they did, it wouldn’t matter, because the world changes too quickly.

Investing well is about calculating odds. And separating process from outcome.

Given what I know about this business and its valuation, is it likely to produce a satisfactory outcome? What’s my margin of safety? How much much am I likely to make if I’m right and lose if I’m wrong?

It’s similar to poker. You can have a good hand and still lose, and vice versa. But if you stay in the game long enough, you’ll get a reasonable outcome, providing you calculate odds well and bet accordingly.

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7. Know your circle of competence

Calculating odds is not only pointless, but dangerous, unless you understand the business you’re investing in, including how it makes money and the key risks.

Some of my biggest investing mistakes came from venturing outside my circle of competence - buying businesses I should have discarded to the ‘Too Hard’ pile.

Investors are often attracted to the complex and esoteric. But, as Warren Buffett says, there are no prizes in investing for jumping over 7-foot bars.

Look for boring, simple, easy-to-understand businesses. Leave the hard stuff for someone else.

8. Think independently

Investing well requires you to assimilate information from various sources and form your own independent judgements. This is much harder than it sounds.

Everyone has opinions. But most people’s opinions are based on other people’s opinions. It’s much easier to take what others are saying at face value (especially ‘experts’) than go to source materials and ask - what do I think?

Don’t outsource your opinions. Try to figure things out for yourself. If you don’t, you’ll constantly be chasing your own tail.

9. Embrace pain

The point when you most doubt your investment approach. When you feel most like an idiot. When you start to question your own abilities. And even your own sanity. That’s the point future rewards are likely to be greatest.

My best investments invariably felt incredibly painful when I made them. I was confused, anxious and felt physically sick when I pressed ‘buy’ - because the world felt like it was falling apart. By contrast, my worst buys and sells often felt the most comfortable at the time.

The lesson isn’t to ignore emotions or try to numb them (impossible). It’s to have the courage to act anyway. To walk towards pain. To do the opposite of what feels natural.

10. Invert, always invert

Instead of asking “How do I succeed?”, the late Charlie Munger always inverted the question to “How do I fail?”, then avoided those behaviours. He once said:

The lesson is simple. Don’t look for good businesses to buy, just avoid the bad ones. Don’t focus on the opportunities, but avoiding the big risks. Don’t seek brilliance, avoid stupidity.

Inversion also works, more often than not, when you see predictions from other human beings. If the consensus is oil prices are heading below $50 dollars a barrel, like a few months ago, it’s probably a good time to be buying oil stocks.

Inversion is an extremely powerful concept, in investing and life. Embrace it.

11. Balance sheets matter more than income statements

The biggest losses tend to come from holding companies with fragile balance sheets. The 2008/09 financial crash was a prime example.

We know what happened to banks and other financials. But many other companies got into needless trouble - despite remaining profitable and cash-generative - because their balance sheets were inappropriately structured.

Almost 20 years on, many investors and businesses have forgotten these lessons. Perhaps because we haven’t had a proper recession since 2008/09 and capital has been freely available (including during the pandemic).

That’s the thing with balance sheets. 99% of the time they don’t matter. But the 1% of the time they do can kill a business. Ignore them at your peril.

12. Cash matters more than profit

Profit doesn’t pay bills. It doesn’t ward off bankers in a crisis. It doesn’t provide oxygen to invest. Cash does. And it’s much harder to fudge than profit.

Always follow the cash, not profits. How much cash flows into the business? How much goes out? Where does it go?

A great test for any business is how much of its adjusted earnings (what management wants you to focus on) convert into cold, hard free cash flow. The answer can be very revealing.

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13. Ignore management and culture at your peril

I’ve witnessed time and again how a bad management team and culture can destroy a good business; while exceptional management can transform a mediocre business into a great one.

My best investments have generally been where I got both right - a good business run by excellent management. And some of my worst have been where I misjudged or ignored the culture.

Few investors would disagree culture matters. But most vastly under-estimate it, in my experience. Probably because you can’t boil it down to a number on a spreadsheet.

14. Management communication matters more than you think

A crucial test of management is whether they explain things clearly, honestly and transparently. Companies that succeed in this tend to be better run, in my experience.

There’s another reason this matters. Good shareholder communication makes all other jobs of an investor easier.

It’s easier to understand what the business does, how it makes money and the risks. It’s easier to gauge whether it’s doing well or badly - and why. And it’s much easier to stick with the business through difficult times.

Look for companies that explain themselves simply in plain English. Avoid corporate gobbledegook, obfuscation and hyperbole like the plague.

15. More information increases confidence, not accuracy

I find little correlation between the amount of information I had on investments and the outcome. But I find a striking correlation between information and confidence.

This is known as the “illusion of knowledge” or overconfidence bias, and has been shown time and again in gambling studies.

It’s crucial to understand what you own. But it’s also vital to differentiate between what matters and what doesn’t. Since 99% of information is noise, an investor’s main job is not information gathering, but effective filtering to get to the heart of what counts.

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16. The order you receive information matters, too

It’s not just the amount of information you gather that matters, but the order you gather it.

I didn’t used to pay this much attention. But then I realised something - a lot of my mistakes were from meeting management first and assimilating information later. By the time my brain had received the message management wanted to give me, it had already made up its mind.

Nowadays, I start with the accounts and work back. I don’t view any promotional material on a business until I’ve already done the majority of the work for myself.

17. The importance of “I don’t know”

Mark Twain famously remarked:

It’s hard to make catastrophic errors when you don’t know things. The big mistakes tend to come from ‘knowing’ stuff. It’s why “I don’t know” are three of the most important words in investing.

99% of the things investors deal with on a daily basis aren’t knowable - including what the economy and stock market will do. There will also be some things you don’t know that others might. That’s fine too.

The key is to acknowledge what you don’t know, and invest accordingly.

18. Embrace checklists

I’ve found checklists to be a useful investing tool, for a few reasons.

First, checklists slow you down. They engage what psychologist, Daniel Kahneman, called Type 2 thinking - deliberate, effortful, conscious - rather than Type 1 (automatic, and often dangerous).

Second, checklists force you to ask questions you might not want to, but you know are important, like ‘what risks am I ignoring?’.

Third, they’re a quick and easy way of seeing whether a business merits further research; before information overload and confirmation bias kick in.

19. Always keep learning

Investing is an infinite game. And unlike many pursuits, you can improve with age.

The key is to keep learning. Never think - ‘I’ve made it’. Always think - ‘I know hardly anything, but I know a little more than yesterday’.

When you make mistakes, rub your nose in them. But be careful not to learn the wrong lessons. Acknowledge luck - good and bad. Separate process from outcome. Learn from others, but most of all, learn from yourself.

20. Know yourself

As the saying goes - “If you don’t know who you are, the stock market is an expensive place to find out.”

Try to understand your own character, and adopt an investment approach that aligns with it.

Do you tend to panic at the first sign of trouble? Maybe automated, regular investing is the way forward. Is researching companies your passion? Maybe a concentrated portfolio will work best. Do you enjoy following lots of companies but don’t want to read note 17 to the accounts? Diversification is probably your friend.

There is no universal right or wrong way to invest. Only a right or wrong way for you. Try to learn the difference.

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