A Duel of Capital Allocators & The Perils of Investing Heroes

Comparing Warren Buffett's and Mark Leonard's investment record and why I prefer having investing role models as opposed to heroes

5 minute read

Last week I made a wild accusation:

I realize this is a controversial comment, as is anything that involves comparing someone to Buffett. And that was kind of the point, I knew some people would be ticked off by this (sorry!) but I think it’s healthy to question your most closely held beliefs — like “Buffett is the best investor in the history of time” which I know many people hold.

For those who don’t know, Mark Leonard founded Constellation Software (ticker: $CSU.TO) in 1996, with the purpose of acquiring small Vertical Market Software (VMS) companies. To say the least, it has been wildly successful in its clearly-laid out strategy. VMS is the opposite of enterprise-level software, which tends to be horizontal and industry broad-based – think Salesforce or Excel. These companies exhibit characteristics of very good businesses: they are leaders in a niche market which tends to be oligopolistic, have high margins, low capital intensity, high switching cost, recurring revenues and strong free cash flow. Because most are small and there are tens of thousands of them (many of which CSU is in close contact with), it makes for an attractive rollup strategy with not too much Private Equity competition.

Many people read ‘serial acquirer’ and will pass on the investment without blinking. I would encourage to look twice here. CSU is not the typical acquisitive company: it pays only in cash, rarely issues debt, has never issued stock (for acquisitions nor employee compensation)¹, is extremely focused on return on investment² and most uniquely: it’s extremely decentralized in its M&A practice, which is done at the business level as opposed to HQ. This means they’ve been able to scale up their transaction volume to ~100 per year, a number that is unheard of in a typical serial acquirer strategy.

The Constellation name is appropriate to their strategy

So back to my wild claim.

Where did I get the idea to say this? I’ve been doing work on CSU the past few months and recently was going over some transcripts of their Annual Meeting³. As I was reading a section where Leonard was explaining their capital allocation process, I thought “wow, this guy is really good, probably as good as, or even better than Buffett”. This was nothing more than a gut reaction, not backed by anything tangible. But then I recalled that CSU stock had compounded at very high rates of returns for the first 16 years since IPO, so I asked myself how would it compare to Berkshire’s first 16 years?

The Duel: Buffett vs. Leonard

I honestly had no idea what the results would look like, I remembered BRK had some really high returns in its early days, but CSU was clearly going to put up a tough fight. It was probably a close match.

But I was wrong. Here’s what it actually looked like:

• Berkshire compounded at a 24.7% return for its first 16 years (1965-1980), a 34X

• Constellation compounded at 35% for its first 16 years (IPO–today), a 122X⁴

Constellation Software total return since IPO vs. Berkshire Hathaway’s first 16 years

What about outpeformance vs. the index? Certainly we’re talking about different market environments, so it would be helpful to see who generated the most alpha.

From 1965-1980, the S&P returned 7.1% (annually, incl. dividends), so Berkshire’s alpha was 17.6%. Pretty incredible!

From 2006-2021 (YTD), the S&P returned 10.8%, Constellation outperformed by 24.2%.

Holy. Mark Leonard won again.

Mark Leonard’s only picture on the Internet. His beard may be his real edge.

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Investing Role Models > Investing Heroes

I’m not poking at or discrediting Buffett here, that would be incredibly stupid from a no name investor like myself. Granted, this is not exactly a physics problem either; it’s nothing more than a thought experiment and I recognize we’re dealing with an 🍎 to 🍊 comparison⁵. Buffett has a 70+ year run, which no other well-known investor that I know of comes close to, even less so with the rates of returns he’s achieved. That’s part of what makes him who he is. Time will tell how long Leonard’s streak will go on for, but it will surely be fascinating to watch closely.

I do think it’s interesting (and funny) how some people get really ticked off when you make a well-grounded claim or criticism against Buffett. He’s become a God-like figure to many people, who essentially worship him. I don’t think this is healthy. Personally, this would prevent me from questioning him, thinking on my own, and closely studying and learning from other great investors, especially those from other disciplines.

Which brings me to my next point. The whole idea behind this was not to pick on Buffett, but to shed some light on who Mark Leonard is, what he has achieved so far and try to convince a few people to pay more attention to him. It’s almost irresponsible not do so at this point! 

“We try and avoid the worst anchoring effect which is always your previous conclusion. We really try and destroy our previous ideas.”

Charlie Munger

Many years ago, I was introduced to the investing world thanks to Buffett. I was hooked instantly after reading his shareholder letters. He shortly became my investing hero, but over time I realized I was idealizing him to an extreme. So I decided it was best to have him as an investor role model instead, and I’ve added more investors to that list over the years.

Of course I still pay close attention to him, but the way I listen to him is now different: I’ve learned to question him, to not follow his every move or advice (imagine staying away from tech because he does!), to grab on to his ideas that resonate with me, and to learn from other investors who I have a high regard for.

Remember, even Buffett who had Benjamin Graham as his hero, didn’t emulate him: he migrated from flipping cigar-butts to buying-and-holding quality, and he found other investing role models like Phil Fisher, Tom Murphy, Henry Singleton and of course, Charlie Munger.

Be flexible, learn from different investors and think for yourself. 

Disclosure: The author owns shares of Constellation Software and Berkshire Hathaway. Not investment advice.

1. Since 2007

2. Average sales multiple paid has been <1x and ROI of acquisitions has likely been ~30%

3. They are available on theTIKR.com, you can also DM me your email and I’ll happily send a few over

4. I am lazy, so I only included total price return. This means CSU total return is even higher (likely approaching 140x) because it’s paid dividends along the way and spunoff an operating group (topicus.com) earlier this year (~10% of CSU market cap)

5. Different time periods, sectors, geographies, interest rate environment, size, inflation, the list goes on and on, and you cannot control for any of this