Listen to the deep-dive discussion – The Freesurfer Stocks That Grow for Free (32:41 min)
“The big money is not in the buying and the selling, but in the waiting.” — Charlie Munger
I. The Architecture
The Infinite Investor framework organizes capital into four functional buckets. Cash (10–25%) is the perpetual option on the future. Index (10–20%) is the humility hedge that guarantees you own the winners you failed to identify. Compounders (40–60%) are individual businesses with durable moats, high returns on capital, and long runways of reinvestment—this is where wealth is built. Amplifiers (5–15%) are asymmetric bets with bounded downside and open-ended upside.
The architecture tells you how much per category. It does not tell you what happens inside each category. Bucket 3—the engine of the portfolio—contains three distinct species that look similar on the surface but behave in fundamentally different ways. Confusing them is one of the most common and most costly mistakes an investor can make.
II. Inside Bucket 3: Three Species
Peter Lynch divided stocks into categories based on growth behavior—Stalwarts, Fast Growers, Cyclicals. His Stalwart was a large, reliable company growing at 10–12% per year. Buy it cheap, take the 30–50% gain, move on. The Infinite Investor borrows the mental model but operates a different framework, classifying not by growth rate but by duration—the horizon over which the business generates its value.
A critical distinction: Lynch’s Stalwart category is broad—any large, steady company qualifies, whether or not it still compounds. The 3A of the Infinite Investor requires active compounding. General Mills and J.M. Smucker are Lynch Stalwarts by size and history. Their structural decline—falling revenues, eroding margins—disqualifies them from Bucket 3. The resemblance between the two models is an analogy, not an identity. The 3A answers to its own rules.
The Stalwarts (3A): Cash Now
Short-duration compounders. The moat is solid, the ROIC is high, and the business is mature. Free cash flow is returned through buybacks and dividends. You recover your capital as you go, like a high-coupon bond. Coca-Cola. Johnson & Johnson. McDonald’s.
Do not confuse Compounder with growth stock. Coca-Cola grows its revenue at three to five percent a year. No one calls it a growth stock. But the value per share compounds at ten to twelve percent—buybacks shrink the denominator, the dividend grows, and the owner’s claim on the business expands year after year. The compounding is in the per-share, not in the revenue. That is precisely what the A does: it compounds without spectacular top-line growth. A Stalwart is a Compounder not because the business grows fast, but because the owner’s share of it does.
Quality strata exist within every species, not just the 3A. A 3A Standard—Procter & Gamble, General Dynamics—is harvested when it reaches fair value, exactly as Lynch prescribed. A 3A Superior—Coca-Cola, McDonald’s—earns indefinite holding because its moat is so wide, so durable, and so structurally permanent that it serves a role no other position can fill. The same gradient applies to the 3B: a Standard Growth Engine is held while the runway lasts; a Superior Growth Engine like ASML or Copart, with an irreplaceable moat and a decade of reinvestment ahead, earns the highest conviction. The distinction is never growth rate. It is the quality and permanence of the moat.
The Growth Engines (3B): Cash Later
Long-duration compounders. Every dollar of free cash flow is reinvested—R&D, capacity, new markets—and each reinvested dollar generates more than a dollar of future value. ASML. Copart. The compounding happens inside the business, not in the shareholder’s brokerage account.
The 3B requires a great capital allocator. The R&D must produce results. The acquisitions must create value. If the reinvestment fails, the long-duration thesis collapses. This is the central risk of the 3B: the execution risk of reinvestment. The growth has a cost, and the cost carries risk.
The Dual-Duration Compounders: Both
The third species is neither 3A nor 3B. It is A additioned with B. Two engines running simultaneously. But the source of the B separates this species into two sub-species, and this separation changes everything.
The Operational Compounder builds its B deliberately. Berkshire Hathaway takes the cash from its subsidiaries (the A) and deploys it into acquisitions and an equity portfolio (the B). Amazon’s AWS prints cash (the A) that funds robotic logistics and AI infrastructure (the B). The B is constructed, paid for, and managed. It requires extraordinary leadership. It carries execution risk.
And then there is the other sub-species.
III. The Freesurfer: A + B Free
Consider Visa. The business model is a toll booth on transactions. Every swipe, Visa collects a fraction of a percent. The free cash flow—over twenty billion dollars a year—is returned to shareholders through buybacks and dividends. In isolation, this is a classic 3A. A magnificent Stalwart.
But eighty-five percent of global transactions are still conducted in cash. Every year, more migrate to digital. Not because Visa invests in digitalization. The banks install terminals. The governments push cashless economies. The consumers adopt mobile payments. The entire world is digitalizing its payment infrastructure for its own reasons, at its own expense.
Visa stands at the center and the river widens around it. The total addressable market expands by a force that is exogenous, structural, and irreversible. The moat widens by doing nothing.
This is the B component—and it is free. Visa does not spend a dollar to capture it. No R&D to develop. No capacity to build. No acquisition to digest. The growth arrives at the doorstep, unpaid for.
The word Freesurfer captures what this species is. A surfer does not create the wave, does not control it, does not pay for it. The wave is the secular trend—digitalization, financialization, indexation. The board is the moat—the duopoly, the regulatory lock-in, the network effect. Without the board, the surfer drowns. Without the wave, the surfer floats. With both, the surfer rides.
A sophisticated reader will object: many businesses benefit from infrastructure they did not build. UPS uses public roads. Amazon rides the e-commerce wave. Is that not the same?
It is not. UPS benefits from a free subsidy on the cost side—the roads reduce operating costs but do not grow, and UPS must still buy trucks, hire drivers, and build sorting centers for every point of growth. Amazon rides a growing wave but must spend tens of billions yearly to convert it into revenue. The wave is free. The capture is not.
The Freesurfer benefits from a free subsidy on the revenue side. The digitalization of payments does not reduce Visa’s costs—they are already near zero per transaction. It creates revenue directly. Every transaction that migrates from cash to digital is a new toll payment. No truck to buy. No warehouse to build.
Three conditions must be present simultaneously: the external force must act on revenue, not costs; it must be structurally growing, not static; and the business must require no material investment to convert the force into profit. Very few businesses satisfy all three. We have identified five. There may be others, but the rarity of the configuration is the point.
IV. A + B = A × B
The Freesurfer is not a 3A that receives a free B on the side. The relationship between A and B is multiplicative.
The free B adds transactions. More transactions generate more revenue. More revenue generates more free cash flow. More free cash flow funds more buybacks. More buybacks reduce the share count. Higher free cash flow on fewer shares means higher FCF per share. The cycle restarts on a higher base. The B feeds the A. The A accelerates. The accelerated A recycles faster because the B keeps pushing the numerator while the buyback pushes down the denominator.
Think of it as an escalator. A pure Stalwart walks on a flat floor—each step of buyback advances, but the floor does not move. A Freesurfer walks on an escalator. Each step advances and the floor rises. The same energy. Twice the elevation.
This is why Visa compounds at fifteen to eighteen percent annualized over a decade while returning eighty percent of its free cash flow. A pure Stalwart returning eighty percent compounds at six to eight. The difference—those eight to ten additional points—is the free B acting as a lever on the A. Among the species we have examined, the Freesurfer appears to be the one where the return of cash to shareholders and the growth of the business pull in the same direction simultaneously, without tension, without trade-off, without a capital allocation decision to make.
V. The Barbell Collapsed Into a Single Point
In the first post of this series, The Volatility Tax, we established that non-ergodicity is the central threat to wealth. Losses are irreversible. A fifty percent drawdown requires a hundred percent gain to recover. The avalanche destroys the path and you cannot climb back. Every portfolio decision must be evaluated through this lens: does it increase or decrease the probability of irreversible loss?
Nassim Taleb’s barbell strategy is the canonical defense against non-ergodicity. Place capital at the two extremes: the shield—cash, bonds, survival—on one end; the sword—asymmetric bets, convexity, unlimited upside—on the other. Nothing in the middle. The middle is the trap: moderate risk, moderate return, vulnerable to the avalanche.
The Freesurfer collapses the barbell into a single instrument.
The A is the shield. Predictable cash flow, systematic recycling, low volatility of results. Visa does not miss quarters spectacularly. The revenue is a toll—it falls mechanically, every day, every transaction. In a crisis, transaction volume dips temporarily but the toll does not disappear—people still pay with their cards. The drawdown is contained. The avalanche is absorbed.
The B is the sword. Structural growth, a TAM expanding over decades, asymmetric upside. But unlike an Amplifier or a pure 3B—where the sword can cut your hand if R&D fails or the market does not materialize—the Freesurfer’s sword is free. There is no stake. The upside arrives without a bet. It is an option on the digitalization of the world with no premium.
This is what makes the Freesurfer perhaps the most anti-non-ergodic asset an investor can own. It resists the avalanche on both flanks simultaneously. The A prevents the catastrophic fall—the cash flow is the piton that anchors you to the mountain. The B ensures the recovery—the structural growth resumes after every storm because it does not depend on human decisions. The digitalization does not stop during a recession. It slows and it resumes. The wave is stronger than the cycle.
Compare this to the other species. A pure 3B like ASML can fall forty percent if the semiconductor cycle collapses, and the recovery depends on a next-generation machine that does not yet exist. The shield is absent and the sword is conditional. A pure 3A like Coca-Cola resists the fall—the cash flow holds—but the recovery is slow because there is no B. The shield is present but the sword is absent.
The Freesurfer has both. The piton and the wave. The shield and the sword. In the same instrument. Without paying twice. Without the tension of the barbell. It is not a compromise between attack and defense. It is the fusion of the two.
And this circles back to where we began. The Volatility Tax is the cost of non-ergodicity. It is paid in drawdowns that require disproportionate gains to recover. The Freesurfer minimizes this tax because the A absorbs drawdowns while the B accelerates recovery. It is the business that pays the least volatility tax relative to how fast it compounds.
VI. The Freesurfer Club
The species is rare. We have identified five candidates—though the list may not be exhaustive.
| Company | Toll | The Wave | Moat Source |
| Visa (V) | Payment processing fee | Digitalization of 85% of global cash transactions | Duopoly + network effects |
| Mastercard (MA) | Payment processing fee | Same wave as Visa | Duopoly + network effects |
| S&P Global (SPGI) | Credit rating fee | Structural expansion of global capital markets | Regulatory duopoly (NRSRO) |
| Moody’s (MCO) | Credit rating fee | Same wave as SPGI | Regulatory duopoly (NRSRO) |
| MSCI | Index licensing fee | Secular shift from active to passive investing | Switching costs + institutional lock-in |
Every Freesurfer we have identified lives in financial infrastructure. They are the toll bridges of the global financial system. The world needs more digital payments, more credit ratings, more index products—and the companies that own these infrastructures invest nothing to capture the growth. It is worth noting that Buffett owns three of them. He has never used the term. But he appears to have seen the structure.
VII. The Gratuity Premium
In a discounted cash flow model, the numerator is blind to the source of growth—a dollar of cash flow is a dollar regardless of whether it was earned by reinvestment or received for free. But the denominator is not blind. The discount rate incorporates risk, including the operational risk that the business will not deliver projected cash flows.
For a Growth Engine, the operational risk is significant: R&D might fail, capex might not yield returns, management might misallocate. For a Freesurfer, that risk is largely absent. The projected cash flows are conditional not on execution but on a secular trend—and structural forces are far harder to reverse than a single project is to fail.
The implication: the discount rate for a Freesurfer should be lower than for a Growth Engine of comparable quality. If the standard WACC is eight and a half percent, the Freesurfer’s might justify a reduction of roughly one percentage point. On a business growing at twelve to fifteen percent for two decades, that difference increases present value by fifteen to twenty-five percent—the difference between a justified PE of twenty-eight and a PE of thirty-five.
Today, Visa trades at approximately thirty times earnings. Analysts price it as a high-quality Growth Engine—comparable to an ASML—with a comparable discount rate. But Visa’s growth does not carry comparable execution risk. The growth is more predictable precisely because it is free—the gratuity removes the execution risk, and the absence of execution risk is what makes the growth structurally more durable. At thirty times, the gratuity premium is likely not fully reflected. The Freesurfer framework does not resolve the valuation question. But it reframes it: you are paying thirty times for a dual compounder whose growth engine costs nothing to run, and whose discount rate should reflect it.
VIII. Sizing the Freesurfer
The four criteria established in Position Sizing: The Final Act of Conviction apply to every Bucket 3 species: moat width, ROIC durability, reinvestment runway, and specific risk. The Freesurfer scores exceptionally on all four. The moat is regulatory or infrastructural—the widest kind. The ROIC is high and stable because the model is asset-light. The runway extends decades because the wave is structural. And the specific risk is low because growth does not depend on management execution.
The Freesurfer’s sizing ceiling—5 to 12%—may be the highest justified by the framework, higher even than the Operational Compounder. This follows from the criteria: the Operational Compounder carries execution risk on its B that the Freesurfer does not. And it follows from the barbell insight: because the Freesurfer contains both shield and sword, it absorbs rather than creates portfolio risk. A position that simultaneously provides downside protection and structural growth does not destabilize the portfolio by being large. It stabilizes it.
A word of precision. The Freesurfer is not necessarily the highest-returning species. A Superior Growth Engine like ASML can compound at twenty to twenty-five percent when the semiconductor cycle is favorable—faster than Visa at fifteen to eighteen. ASML’s B is a rocket engine. The Freesurfer’s B is an ocean current. The raw horsepower is not the same. But the Freesurfer’s superiority was never about velocity. It is about role. It stabilizes because the A absorbs shocks. It secures because the B does not depend on execution. It compounds in cruise control because there is no capital allocation decision to monitor. It liberates because the attention cost is near zero. And it resists the avalanche on both flanks simultaneously. A Superior 3B may be the best growth engine in a portfolio. The Freesurfer may be the best asset to own. These are not the same thing.
Category does not dictate sizing. Conviction does. An exceptional 3A Superior like Berkshire can outsize a fragile 3B. A Freesurfer riding the digitalization wave can justify more capital than an Operational Compounder whose B depends on a single CEO’s judgment. The four criteria determine the weight. Duration is one input, not the dictator.
IX. The View from the Mountain
In The Way to the Mountain Guide, we established that time is the investor’s most finite resource. Every hour spent monitoring a position is an hour stolen from life. The path to the mountain—the place where the portfolio serves you rather than you serving the portfolio—requires businesses that do not need you.
A 3B demands vigilance. Is the R&D on track? Is the next product generation on schedule? Is the capital being allocated wisely? The attention cost is high because the B is built, and what is built can fail.
The Freesurfer asks a single question, once a quarter at most: is the wave still there? Is the digitalization continuing? Are the capital markets expanding? Is the shift to passive investing progressing? This is not a question of execution. It is a question about the structure of the world. And the answer changes slowly—over years, not quarters.
The Freesurfer has the lowest attention cost of any species in Bucket 3 and one of the highest expected returns, thanks to the A × B. It is difficult to think of a more favorable ratio of return to attention.
Imagine the Mountain Guide. He has made the climb. He has left behind the noise—the daily quotes, the earnings call obsession, the bookmarks at 0.2% consuming attention they do not deserve. He is in the village on the mountain. The air is clear. The time belongs to him.
From there, he looks down at the ocean. And on the ocean, far below, a figure on a board. The Freesurfer. Not rowing. Not struggling. Standing still while the wave carries them forward. The guide does not need to go down to help. The Freesurfer does not need him. That is why the guide can stay on the mountain.
The book began with a disease—the non-ergodicity of compounding, the volatility tax, the avalanche that destroys and does not forgive. It arrives here at something that resembles a cure: a species of business that contains the avalanche through its shield, compounds through its sword, and demands almost nothing from the investor who owns it. Not a compromise between attack and defense. The fusion of both. The barbell collapsed into a single point.
Lynch had his Stalwarts. Buffett had his Inevitables. The Infinite Investor has its Freesurfer.
We have found five so far. They live in financial infrastructure. They compound without effort. They return cash today while the world builds their future for free.
If you find one, size it accordingly. Then go to the mountain.
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This post is part of the wealth architecture described in The Infinite Investor, available at averagingup.com.
Related posts on this site:
- “The Volatility Tax and How to Defeat It” — The mathematical foundation of Skewness and Ergodicity.
- “Beyond the Average: Mastering the Hidden Mathematics of Compounding” — The four-category system and the framework for classifying holdings by function.
- “Growth and Multiple Expansion: the Twin Engines of 100-Baggers” — Why durable Compounders deserve large positions.
- “Great Businesses Compound Their Earnings at High Rates” — The selection criteria that identify businesses worth sizing up.
- “Position Sizing: The Final Act of Conviction” — Why the weight of a position is the decision that validates all the others, and the four criteria that calibrate every Compounder.
- “The Attention Cost: Why Your Smallest Positions Are Your Most Expensive” — Why fragmentation destroys value beyond the portfolio.
- “The Way to the Mountain Guide” — When the portfolio becomes the position.