Joshua Derrington, Chief Investment Officer, Alvia Asset Partners
Published in the Australian Financial Review 17 April 2025
Mistakes are part of investing; they’re unavoidable. The key is learning from them. Reflecting on where you went wrong sharpens judgement, refines decision making and, ideally, stops you from making the same mistake twice.
The Costliest Sell of My Career
My own most glaring error is simple, and one I have made many times: selling compounders too soon based on valuation alone.
A compounder is a business that consistently reinvests its excess cash flow into high-return opportunities, fuelling long-term growth. Selling them prematurely, without assessing how effectively they reinvest, can mean walking away from years, even decades, of compounding returns.
Take Texas Pacific Land Corporation (TPL) for example. My old friend. My long-time companion. The stock I lovingly held for years, watching it transform from a quirky little land play into a juggernaut. It was a simple but powerful thesis:
And yet, in 2021, I did what “disciplined” value investors are trained to do – I sold it.
Why? Because it had done too well! The stock had run hard, and I convinced myself it was expensive. I looked at the valuation, nodded sagely, and took my chips off the table. After all, stocks don’t just keep compounding forever… right?
Well, fast forward to today, and TPL has done what great businesses do – it compounded even more. It didn’t just walk away; it sprinted, adding billions in market capitalisation.
Since I sold, the stock has grown fivefold – a little reminder that what looks expensive today can still be a bargain in hindsight. To put it in painful dollar terms: for every dollar I took off the table, I effectively left another five sitting there.
What seemed like a costly mistake at the time has, in fact, shaped the past 20 years of my investing career. It taught me that valuation matters, but quality compounders reward the patient investor.
Quality trumps valuation in the long term
First things first: unless the price is truly egregious, never substitute a business you know intimately for one you don’t, because of valuation alone. Speaking from personal experience – the millions lost from selling quality compounders like TPL too soon has taught me that chasing a ‘bargain’ can blind you to long-term potential.
The price you pay is undeniably important, but what you own matters more – especially if you intend to hold for the long run.
Investors often fixate on finding a bargain, believing that cheap is synonymous with good (often referred to as bargain mentality). Investors should instead focus on paying a fair price for truly enduring assets. The real magic happens when earnings and free cash flow growth drives multiple expansion.
TPL is not just my personal battle scar – it’s a classic mistake for most fundamental investors who do deep valuation work. The very thing that makes us good at finding bargains can make us blind to the upside of truly exceptional businesses.
We focus on the potential for mean reversion but forget that some companies don’t revert – they transcend. We cynics forget to look up and see the blue sky – the potential for good businesses to just keep getting better, like a fine wine.
Patience is a virtue
Conservative investors are wired for scepticism. We sweat over every multiple expansion, obsess over the possibility of declining returns on capital, and dissect every macro risk that might hit earnings in the next 12 months. What we often miss though, is that over time, very good things tend to happen to very good businesses.
The key lesson? When a company has deep competitive advantages, untapped pricing power, or the ability to reinvest at high rates of return for longer than we expect, the correct move isn’t to get cute with valuation alone – it’s to sit back and let the compounding happen.
This experience is a stark reminder: true compounders reward the patient investor, even when valuation metrics blind us to how resilient these companies truly are.
Simplicity beats complexity
Particularly early in my career, when I felt like I had something to prove, I’ve fallen into the trap of overcomplicating investment decisions.
Like many investors, I equated complexity with intelligence. But the market doesn’t reward convoluted analysis; it (eventually) rewards sound risk management, and investors that hold the lesser exciting, but enduring assets, over the long-term.
In fact, some of the best investment ideas fit on a post-it note – not emerging from a convoluted financial model.
TPL wasn’t a fluke. This has happened to me before, and I’ll bet it has happened to you too.
CSL looked expensive at $100. Apple seemed to have no margin of safety at $150. And how many times have we seen investors sell Berkshire Hathaway because “book value was getting a bit rich”? These businesses didn’t just stay great – they became even greater in ways that backward-looking valuation models couldn’t fully grasp.
The best compounders don’t need elaborate justification; they thrive on patience and simple, fundamental research.
By resisting the urge to overcomplicate our decisions, we allow true compounders do what they do best – compound.
So, what’s the takeaway?
Sometimes, the best investing decision is… do nothing.
When you truly understand a business, when it has all the hallmarks of a long-term compounder, the biggest risk isn’t overpaying – it’s selling too soon.
So, what now?
If anyone needs me, I’ll be over here, raising a glass to TPL – an expensive lesson that sometimes the best compounders deserve their premium.
And finally, I’ll let you in on a secret – just before Christmas, TPL fell 35%. So… I bought it again. Let’s see if I’ve learnt my lesson this time.
Wish me luck.