Lessons Learned from Superinvestor Dev Kantesaria
A deep dive on lessons and everything Dev Kantesaria has taught us investors
All of us investors claim to be investing in what we deem to be the highest quality companies. But is this really the case?
This man puts these words into action.
Who is Dev Kantesaria?
Dev Kantesaria is the founder & equity hedge fund manager for Valley Forge Capital Management (VFCM), managing over $4 billion in assets under management today.
He is known for managing a high-quality concentrated portfolio of what he deems as the highest-quality companies that are listed publicly (we will dive into his portfolio soon).
By following his rigorous investment approach, VFCM has returned to its investors a staggering 15% CAGR vs the S&P500’s 10% since 2007 (!)
Table of Contents
VFCM Investment Approach
History of Dev Kantesaria
Past Transactions of his Portfolio
Dev’s Thoughts on Valuation
Key Lessons to Learn from Dev Kantesaria
Resources on Dev Kantesaria
1) VFCM Investment Approach
Valley Forge Capital Management focuses on a quality investment style approach, meaning investing in the highest-quality businesses with (not an exhaustive list):
Mission-critical product/service
Deeply entrenched in their respective industries (#1 or #2 in market position)
Favorable industry secular trends and tailwinds
Strong organic growth
Predictable and fast-growing earnings & free cash flow
Capital efficiency
Prudent management
Disciplined stewardship of capital allocation (value-accretive investments; returning capital back to shareholders)
Durable competitive advantage
Pricing power
Scalable from flexible cost structure
High returns on invested capital
Notice how almost all of the companies that meet this criteria are typically found in the software/IT, financial services, and payments sector, which are sectors that generate a high return on capital with little CAPEX requirements to run and are highly scalable with little to none marginal costs per customer acquired.
Because of this rigorous and disciplined investment approach, VFCM takes a long-term investment horizon approach and being patient to wait for the results to pull through and compound.
Dev also is careful with portfolio construction as he allocates more of VFCM’s funds toward deeper moat and more predictable companies, such as Fair Isaac Corporation (FICO), representing more than 30% (!) of the current portfolio.
Dev believes in building a portfolio focused on only the best ideas. By the time they reach the 15th stock, the risk/reward proposition no longer seems attractive. In their view, a portfolio limited to 8-12 carefully selected names is the most effective way to significantly outperform benchmarks over the long term.
“In our minds, a portfolio with a limited number of carefully-selected names is the only way to significantly outperform benchmarks over the long term.”
— Dev Kantesaria
As a result of a concentrated portfolio, Dev often sits on his butt until he deems an opportunity worthwhile when considering both businesses in his investable universe and at a reasonable valuation (FOMO is a very real thing). In the world of quality investing, sometimes it takes a long time before you can enter a position that you have been keeping an eye on at a valuation you deem reasonable. In some cases, in can take years.
“Most investors these days want to invest in quality businesses at attractive prices. Most investors also don't appear to be quite as good at it as Dev Kantesaria.”
— Value Investor Insight 2019
One could also argue that despite the portfolio's concentration, Dev’s investments remain diversified. This is because the companies, though primarily U.S.-based, often operate on a large scale across multiple countries, providing exposure to global markets anyway.
Dev focuses on all these characteristics in his companies because ultimately in the long run, share price follows the free cash flow per share evolution. Companies that possess these characteristics are able to churn out free cash flow growth over various times of the business cycle predictably (the key word here being predictably).
2) History of Dev Kantesaria
Dev Kantesaria’s life before VFCM:
Completed his undergraduate degree from Massachusetts Institute of Technology (MIT)
Went to Harvard Medical School to become a surgeon but dropped out during his third year
Worked at McKinsey & Co as a Senior Associate management consultant for 2 years
Worked 18 years (!) in venture capital (VC), specializing in the biotech sector
Founded his own hedge fund with a focus on long equity positions
From his background before VFCM, we can learn that:
Working in VC has taught Dev the importance of a risk/reward proposition — making him realize that quality businesses are much more superior
Working in the biotech sector has developed a strong circle of competency for Dev into more predictable companies
As a McKinsey consultant, Dev had access to C-level management
“The venture model – invest in 12 companies, lose all your money on half, get your money back on a few and hope to hit it big on the rest – didn’t strike me as a reliable way to make money on a risk/reward basis over time.”
— Dev Kantesaria
As a result of these experiences, he has gained a behavioral/psychological edge to beat out 95% of active fund managers.
3) Past Transactions of his Portfolio
According to Dataroma, Dev has owned these stocks at some point (or is still holding to them today):
Fair Isaac Corporation ($FICO) — Data-analytics company distributing consumer-credit scores on mortgages, auto loans (etc.) used by lenders to assess credit risk.
S&P Global ($SPGI) — #1 Credit Rating Agency providing financial information, analytics, and credit ratings to global markets.
Moody’s Corporation ($MCO) — #2 Credit Rating Agency specializing in credit ratings, research, and risk analysis for financial institutions.
Mastercard ($MA) — Natural duopoly & toll booth with Visa for global payment processing to enable digital transactions across networks.
Visa ($V) — Natural duopoly & toll booth with Mastercard for global payment processing to enable digital transactions across networks.
Intuit ($INTU) — Develops financial software for tax preparation, accounting, and small business management.
ASML Holding NV ($ASML) — The only manufacturer of extreme ultraviolet (EUV) lithography machines used to produce semiconductors found in electronics today.
Aspen Technology ($AZPN) — Provides software solutions for optimizing industrial operations in asset-intensive industries.
Amazon ($AMZN) — Global e-commerce, cloud computing, and logistics company offering a wide range of products and services.
Adobe ($ADBE) — Software company known for creative and multimedia products like Photoshop and Acrobat to aid creative designers.
Autodesk ($ADSK) — Specializes in software for design and engineering, particularly in 3D modeling and architecture work.
All of these companies are arguably monopolies or oligopolies in their respective industries.
His current portfolio (as of Q3 2024):
From his current portfolio, you may have noticed that:
FICO represents one-third (34%) of the portfolio
S&P Global and Moody’s are essentially a duopoly and collectively make up another one-third (32%)
Mastercard and Visa are a payments duopoly, collectively making up 23%
Therefore, around ~90% (!) of the portfolio is held by the financial services monopolies/duopolies. Talk about concentration! The rest of the portfolio, representing a small portion (~10%), is still held up by monopolies in their own right, being Intuit, ASML, and Aspen Technology.
When looking at the performance of the stocks within his portfolio, almost all of them have returned a substantial outperformance against the S&P500 (as a benchmark):
He truly is one of the best quality superinvestors in my opinion, based on his investment philosophy and returns.
4) Dev’s Thoughts on Valuation
Although not discussed in detail online, Dev uses a discounted cash flow model.
As a rough guide though, Dev calculates the free cash flow yield of the current year and next year and compares this number with the current U.S. 10-year treasury yield. VFCM also calculates what they think the free cash flow yield of the company should be trading at based on business quality and future growth. He also does not include assumptions for any future optionality success, only sticking to the parts of the business which represent his original core investment thesis. Any surprise from optionality success plays to the upside in the valuation instead (making these assumptions quite conservative to an extent).
To take an example, company named Quality XYZ may pass all the criteria and is already well researched to be added to a watchlist as part of an investable universe. Based on predictability of Quality XYZ’s FCF growth and current FCF per share, it may trade at a 4.0% FCF yield on 2026 estimates. Comparing this with the current risk-free rate (at the time of writing) at 4.2% treasury yield, the investment into Quality XYZ may be viewed as slightly ‘expensive’ and may not be investable at this time, depending on your margin of safety and conviction for the company.
“As shorthand, we look at the current free-cash-flow yields of a company based on our estimates for this year and next year. We then calculate what we believe those yields should be based on the quality and growth of the future cash flows. Our expected yields will also depend on the risk-free rate, using the 10-year Treasury as a proxy. We want to buy businesses at at least 30% discounts to our expected free-cash-flow yields. This gives us a margin of safety in case our investment thesis doesn’t play out according to plan.”
— Dev Kantesaria
When there are no opportunities present in the market at a given moment, VFCM typically holds a cash position and only puts it to work when great ideas present themselves (a quality company trading at a reasonable valuation).
5) Key Lessons to Takeaway from Dev Kantesaria
The intelligent investor should never sacrifice business quality for a seemingly “cheap” valuation.
Know your companies inside and out. You need to understand your companies thoroughly before opportunities arise — and opportunities arrive for a short period only. Without that knowledge, you won’t have the conviction to buy when everyone else is selling.
The window of opportunity to buy quality companies at great prices only arise for a sudden and short moment. These are often due to broader market dislocation or company-specific issues like a poor earnings report, increased competition, regulatory or legal concerns, or even simple market neglect. These pricing inefficiencies can last a day, a week. The role of the investor is to be ready to capitalize when these inefficiencies arise.
When finding ‘true quality’ companies, you have to dig deeper and look for the subtle signs of pricing power (because companies won’t say that they do have pricing power!)
Stick to your own circle of competence. There will be many companies out of your circle of competence that you will definitely miss the train on. Do not chase companies that you don’t understand and only focus on great companies that you do understand.
Monitor existing companies within your portfolio even after buying into them. It is important that the company does not detract from your original investment thesis and stray into shareholder value destructive decisions (such as investing into pet projects with no returns in sight).
Instill a patient temperament. There will be always be noise from the media and Wall Street and can result in the intelligent investor making poor irrational decisions. Stick to your investment thesis and let it play out over time.
Do not chase quality companies at rich valuations (FOMO). It is best to wait for a window of opportunity when it arises (can take years). Investing into a great business at a poor valuations can still yield poor investment returns.
Dev says that, investing in public markets is the most reliable way to build long-term wealth, providing a fairer meritocracy than private markets, as all investors have equal access to the same companies, creating a level playing field.
6) Dev Kantesaria-related Resources
In closing, I have compiled a list of resources found online that may be useful to you in learning a thing or two from Dev Kantesaria.
“Dev Kantesaria, what is your formula for quality investing?” By Good Investing Talks Podcast
Buffett Investing Principles w/ Dev Kantesaria (TIP389) by The Investor's Podcast Network
Why Valley Forge Is 99% Invested in Stocks by Bloomberg
Market Monitor: Dev Kantesaria
FICO: A High Score Business - [Business Breakdowns, EP.111]
“How This Hedge Fund Beats the S&P 500 With 20 or So Quality Stocks” by Barron's
Why Fair Isaac (FICO) is Valley Forge Capital's Largest Position
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