Most investors obsess over stock prices. They stare at red and green flashing numbers, wondering if they should buy or sell. But the true legends of the investing world? They don't look at the stock price first. They look at the engine inside the company.

I want to share a framework from Chuck Akre, a master of the "buy and hold" philosophy. He discovered early on that a stock's return usually mirrors the business's return on its own capital.

If a business earns 20% on the money invested in it, the stock price will eventually follow that trajectory. To find these winners, Akre uses a mental model called the Three-Legged Stool.

If you want to move from "gambler" to "wealth builder," you need to make sure your investments stand on these three sturdy legs.

You are looking for a "Compounding Machine." These are businesses that generate high returns on the owners' capital. They don't just make a profit; they make a profit easily and consistently because they have a competitive advantage.

Think of companies with "moats" around them. They survive inflation, recessions, and competitors because their underlying math is simply superior.

Who is driving the bus? You want managers who are "killers" at running the business but also treat shareholders like partners.

The critical question here is: Does the management act like owners? You want leaders who have skin in the game and make decisions to increase the per-share value of the company over decades, not just to hit next quarter's bonus targets.

This is the most critical leg, and the one most investors miss.

It is not enough to make a profit. The magic happens when a company can take that profit and reinvest it back into the business to earn those same high returns again.

Imagine a business that earns $100. If they can put that $100 back to work and turn it into $120, and then turn that into $144, you have a compounding machine. If a company generates cash but has nowhere to grow, the compounding stops.

Once you find a company with all three legs, what is the hardest part? Doing nothing.

Akre warns that selling a great company just because the stock price looks "expensive" is often a mistake. He shares a common regret: selling a stock at $40 because it looked pricey, hoping to buy it back at $25. Instead, it goes to $300.

Great businesses are rare. If you own a goose that lays golden eggs, do not sell it just because the price of geese went up. You hold it as long as those three legs remain broken.

Next time you look at your portfolio, ask yourself: Am I holding a compounding machine, or am I just renting a stock symbol?

I’d love to hear from you: Do you own a stock that fits the "Three-Legged Stool" criteria? Reply and let me know which company you think is a true compounder!

To your wealth,