How does HexaShield Tested Investing work?

HexaShield Tested Investing is only investing in companies that pass the rigorous HexaShield Framework test.

The underlying premise of HexaShield tested investing is that we live in an increasingly disruptive world where the lives of businesses have gotten shorter and that the source of all long-term returns is simple - businesses generating high returns on capital and their ability to reinvest at incrementally high rates.

On the first aspect, a recent study by McKinsey found that the average lifespan of companies listed in Standard & Poor’s 500 was 61 years in 1958. Today, it is less than 18 years. McKinsey believes that, in 2027, 75% of the companies currently quoted on the S&P 500 will have disappeared. Therefore, it's important to only be invested in companies that showcase the ability to survive in a disruptive world, a quality that is exhibited by companies that pass the HexaShield tests.

Secondly, over the long term, investing boils down to one simple fact as summarised succinctly by Mr. Buffett - "Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return."

A breakdown of the returns of the S&P 500 (Figure 1) of the last century beautifully illustrates this point. Even if an investor would have invested at the lowest multiple in 1917 and cashed out at the highest multiple of the century in 1999, the return attributable to the expansion of earnings would merely be 2.3%. This can be easily calculated on a Texas BA II Plus calculator by inputting -5.3 as Present Value (PV), 34 as Future Value (FV), period(N) at 82 years, and computing the return would throw up 2.3% as the CAGR over 82 years. During the same period, the S&P 500 actually delivered returns of 11.6% on a compounded basis which means that 9.3%p.a. (i.e. 11.6% - 2.3%)actually came from the compounding of reinvested earnings over time. This contributed to 80% of the total returns.

Therefore, the ability of a company to be a truly compounding machine which is characterised by its ability to generate a high return of capital and reinvest at a high incremental rate is the core and that's a quality that is exhibited by companies that pass the HexaShield tests.

Related Articles:
Maintaining Efficient Portfolio Turnover
Buying Efficient Companies
HexaShield Tested Investing - Introduction

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