Chit Chat Stocks — Super Investor Series: Dev Kantesaria of Valley Forge Capital

Episode Title: Great Compounding Machines That Crush The Market (Plus, New Stocks He Has Bought)
Date: August 27, 2025
Hosts: Brett Schaefer & Ryan Henderson

Episode Overview

This episode of Chit Chat Stocks dives deep into the approach and track record of Dev Kantesaria, the founder of Valley Forge Capital—a fund manager whose disciplined Buffett/Munger-inspired philosophy has allowed his firm to significantly outperform the market for nearly two decades. Brett and Ryan break down Kantesaria's background, explain his investing philosophy, analyze his high-conviction "compounding machine" portfolio, and examine specific case studies including FICO and S&P Global. They also discuss notable new buys and close with Kantesaria's provocative take on the future of AI in investing.

1. Dev Kantesaria — Background & Unique Path (01:24–06:12)

• Unconventional Origins:
  • Kantesaria originally aspired to be a surgeon, earning a biology degree from MIT and attending Harvard Medical School, but left medicine for management consulting at McKinsey, then spent 17 years in healthcare venture capital.
• Key Quote:

  “As a venture capitalist, I gained a tremendous amount of experience on the operational side of businesses, which is an important background to have as a public equity investor.” — Dev Kantesaria (03:21)

• Fund Genesis:
  • Started Valley Forge Capital in 2007 with just $300,000—likely his own funds after a lucrative VC career.
  • Designed the early fund for family and friends; now manages $5 billion in AUM.

Insight: Despite a background in medicine/healthcare VC, Kantesaria almost exclusively invests in large-cap, wide-moat, capital-light businesses outside his old sector.

2. Investment Philosophy & Portfolio Construction (07:58–17:05)

• Influence: Inspired most by Warren Buffett and Charlie Munger, focusing on business quality and low turnover (“genetic component” to frugality and cautiousness).
• Core Principles (09:27):
  • Bottom-up, fundamental analysis.
  • Prioritizes organic growth, predictable earnings, capital efficiency, prudent management.
  • Seeks compounding machines—avoids “cigar butts” (deep value stocks with declining relevance).
  • Extremely concentrated: holds 5–10 top ideas.
  • Long time horizon: analyzes over multi-year timeframes.
  • Margin of safety; minimal leverage; liquidation risk managed by business quality.
• Key Quote:

  “Finding businesses with strong organic growth, predictable earnings, capital efficiency and prudent management ... focusing on compounding machines and ignoring cigar butts ... analyzing companies over a multi-year timeframe ... concentrating heavily in your best ideas.” — Brett Schaefer (09:44)

• Narrow Focus: Only about 50 companies worldwide fit his “pond of quality,” heavily favoring monopoly/duopoly dynamics and pricing power.

3. Analytical Overview: What’s in the Valley Forge Portfolio? (18:14–25:56)

• Portfolio Stats:
  • Weighted Average Market Cap: $237B — strictly large caps
  • Operating Margin: 47% (market average: 10–15%)
  • 10-Year Revenue CAGR: 10.6%
  • EBIT Growth: 13.8% (margin expansion focus)
  • ROIC: 28%; ROA: 21%
  • CapEx/Operating Cash Flow: 1–6% (most holdings super capital-light; e.g., FICO 1%, S&P Global 3%). E.g., Meta’s is 50%.

Insight:
“These are companies that just don’t need a whole lot of incremental investment in order to grow.” — Ryan Henderson (22:14)

• Portfolio Concentration (as of recording):

  • FICO (Fair Isaac): ~31%
  • S&P Global: ~26%
  • MasterCard: ~18%
  • Moody’s: ~15%
  • Visa: ~7%

• Notable: Kantesaria owns very little tied to his domain expertise, almost entirely opting for compounding, capital-light, entrenched industry leaders.

4. Case Study #1: FICO (Fair Isaac) (26:47–36:56)

• Entry Points:
  • First bought in Q2 2018, added especially during periods of narrative-driven selloffs (e.g., upstart “disruption” hype).
• Performance:
  • May 2018 to present: +694% cumulative (vs. +171% for S&P 500).
  • Estimated annualized return: 33%.

What Makes FICO a “Great Compounding Machine”?

• Operating Leverage, Minimal CapEx:
  • “For example, [FICO] charges $4.95 for a mortgage origination ... selling an additional FICO score comes with 95% incremental margin and zero capital requirements.” — Brett Schaefer (28:28)
  • 2013: $181M revenue, 72% margin; LTM: $1.1B revenue, 88% margin (possibly the highest in public markets).
• Unassailable Moat:
  • Network effect (“everyone uses the FICO score”), regulatory moat (required for mortgages since 1995), high-profit subscription model.
• Untapped Pricing Power:
  • No price hikes for 25 years; since 2016, price increased nearly 5x with minimal churn/loss.
  • “FICO could increase its pricing by 10x and it would still be a high value to mortgage loan loans relative to the cost.” — Dev Kantesaria, as paraphrased by Brett (32:43)

Key Lessons:

• Perfect intersection: Predictable, growing, capital-light, with exceptional pricing power and network effects.
• “Masked profitability” unlock: FICO’s valuation looked expensive in 2018 but operating margin was poised for step change after new price hikes and software investments matured.
• Serial share buybacks: Shares outstanding down 62% since 2005 (~4.8%/yr).

5. Case Study #2: S&P Global (37:55–44:12)

• Purchased: Between 2008–2009, during the financial crisis when the business’s outlook was under heavy regulatory and reputational pressure.
• Key Quote:

  “These companies had among the best business models in the world ... Effectively, there is no way to undercut Moody’s or S&P on price ... they raise their prices pretty much every year at slightly above inflation.” — Dev Kantesaria (40:06)

• Performance:
  • More than a 40-bagger off 2008 lows; Kantesaria personally: ~30-bagger (initial cost $17.50, now ~$550).
  • Operating margins up from 28% to 40% (2010–2025); 10% annualized revenue growth.
• Portfolio scaling: Continuously added over time, not just at lows; holdings grew from 300k to 2M shares (2016–2025).
• Capital continuity: Compounding businesses with this level of durability and pricing power mean that “most days are a good day to buy shares.”

6. Performance Analysis & Recent Buys (45:15–50:57)

• Valley Forge Returns:
  • Estimated 15% annualized since 2007 (S&P: 10–11%).
  • Somewhat “lower than expected” given individual holdings’ outperformance; possibly due to capital inflows and new buys diluting high-return legacy positions, and/or portfolio cash/losers.
• Recent Buys (since 2023):
  • ASML: “Probably the most interesting recent addition ... sort of not his typical bread and butter. I really like that.” — Ryan Henderson (49:10)
  • Equifax: A FICO customer, further reinforcing Kantesaria’s “network of entrenched financial infrastructure” theme.
  • MSCI: Classic data/financial moat, capital-light, but still a smaller allocation.
• Implications:
  • When Kantesaria adds to a new name, given his rare turnover, it signals a “potential buy or watchlist candidate” for long-term investors.

7. Key Kantesaria Lessons & Takeaways (51:36–57:33)

Ryan’s Takeaways (51:36):

• Monopolies/duopolies deliver sustainable double-digit earnings growth—even in slow-growing industries—thanks to steady pricing power.
• “Often the best action is inaction”; owning compounding machines often means sit tight, maybe buy on dips, don’t over-trade.
• Quote:

  “Pricing power is the hallmark of a great business. If you can raise your prices above the rate of inflation consistently, you have a phenomenal business model.” — Dev Kantesaria (adapted via Ryan, 54:10)

• Be a “business historian”—deep knowledge of a company’s history helps weather inevitable turbulence.

Brett’s Takeaways (55:00):

• Untapped pricing power is a must; businesses must be able to offset inflation with ease (e.g., FICO, Visa/MasterCard, S&P, Moody’s).
• “Let your winners ride”—massive returns often come from letting high-conviction names become huge portfolio weights, only trimming at truly absurd valuation extremes.
• Be disciplined at the buy price, “wiggle room” at the sell; even at elevated multiples, compounding machines purchased early can meaningfully outperform.

8. Memorable Moment: Kantesaria’s Take on AI & Big Tech (57:34–61:31)

Quote from Dev Kantesaria (paraphrased from his Dec. 2024 Investors Podcast appearance):

“Big tech–they are above quality business models ... but the concern I have is what happens after the next few years. It’s our view that AI becomes commoditized and it becomes difficult for these companies to monetize their AI offerings ... R&D expenses and capital expenditures are going up exponentially ... If an off-the-shelf AI can do 98% of all human tasks, how do you monetize that? ... There will be a bad ending for most people because it’s very hard to predict the real winners.” (57:34–59:13)

• Ryan’s Response:
  “I certainly don’t think I agree ... there’s going to be an off-the-shelf AI that can do 98% of all tasks ... Microsoft, Google, and Amazon have moats in other ways, and will be winners from the cloud side of AI.”
• Brett’s Context:
  Kantesaria’s high premium on predictability means he dislikes the new uncertainty AI introduces—even if others find it exciting.

Timestamps for Key Segments

• Background & Approach: 01:24–07:58
• Philosophy & Portfolio Construction: 07:58–17:05
• Portfolio Analytics: 18:14–25:56
• FICO Case Study: 26:47–36:56
• S&P Global Case Study: 37:55–44:12
• Performance & Recent Buys: 45:15–50:57
• Investor Lessons: 51:36–57:33
• AI Take & Closing Thoughts: 57:34–61:31

Final Takeaways

• Valley Forge’s Magic: Relentless focus on capital-light “compounders” with pricing power, in entrenched industry positions, owned with extreme discipline and infrequent trading.
• For Listeners:
  • Kantesaria’s rare activity in buying/selling could be predictive for long-term investors.
  • Even with “slow” annual returns by superinvestor standards, the relentless compounding and low turnover pays off.
  • If you want a real-world “Buffettian” long-term blueprint, study Valley Forge’s holdings and methodology.