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Books

100 Baggers: Stocks that Return 100-to-1 and How to Find Them by Christopher Mayer

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary
  1. An updated version of Phelps’ 100 Baggers, this book takes you through examples of stocks that have turned $1 into $100 since 1962 and how to go about finding the next 100 baggers.
Key Takeaways
  1. 100 baggers are stocks which turn a $1 investment into $100 over a certain period of time. The average stock in Mayer’s research took 25 years to reach 100 bagger status, compounding at over 21% per year on average
    1. 100 bagger essentials – have to look for them; all about growth (sales, EPS, ROC, ROE, ROA); lower multiples preferred; twin engines of growth (lots of growth and low multiple); economic moats; smaller companies preferred; owner-operators preferred; coffee can approach; need a good filter to drown out the noise and keep conviction; luck helps; must be a reluctant seller
  2. Every human problem an investment opportunity if you can anticipate its solution
  3. Like Phelps said, “must buy right and hold on
    1. Investors must distinguish between activity and results. Do not buy/sell simply out of boredom!
    2. Focus on the actual business – earnings, ROE, ROA and not price and never worry about market timing
  4. Look for “new methods, new materials and new products – things that improve life, that solve problems and allow us to do things better, faster and cheaper. There is also an admirable ethical streak to Mr. Phelps’ style, as he emphasized investing in companies that do something good for mankind.”
    1. Simply looking at numbers often misses the point – must truly understand how a company can create value in the years ahead
  5. Never take an investment action for a non investment reason (selling for tax reasons, want for action…)
  6. Coffee Can portfolio – take a portion of your money and select the best stocks you can and hold on for 10 years. Typically look at more established companies, with long runways that have the potential to compound for 10+ years
    1. Can serve as a crutch as it forces you to extend your time horizon and understand how the company will create value and be around for the next 10 years
  7. Must be able to stomach multiple 50%+ drops along the way
  8. Choose a leader, industry, country with a compelling story and be willing to face tremendous drops in value. As long as story remains intact, simply hold on
  9. Twin Engines of growth – PE expansion and exploding earnings
  10. Three legged stool – businesses that have historically compounded value per share at very high rates; highly skilled managers who have a history of treating shareholders as though they are partners; business that can reinvest their free cash flow in a manner that continue to earn above average returns
    1. Importance of high ROC and ability to reinvest that cash to continue earning high ROC is the key to finding 100 baggers
  11. SQGLP – Small, quality business and management, growth in earnings, longevity of quality/growth, price is low
  12. Don’t underestimate share buybacks – look at AutoZone
  13. Median sales for pre 100 bagger companies is about $170m and median market cap is about $500m. This gives a P/S of about 3 which is not cheap on a traditional basis
    1. Big ideas, potentially large markets, pricing power, brand, dominate a niche
  14. Takes vision, courage to buy and patience. can’t always see the potential in the financials
  15. Prefer to pay healthy price for high growth and return than cheap price for mediocrity. Be willing to pay a fair price for a quality company/management
  16. Screen – high ROE (>15%) for 5+ years through high profit margins (and not leverage), sales growth of >10% for 5+ years
    1. Capital allocation, inside ownership vital (10-20% of company) huge
  17. Companies with high insider ownership are often discounted because they aren’t liquid enough to be included in ETFs
  18. Highlights current “Outsider” CEOs – TDG, DHR/CFX, VRX, NVR, XOM, MKL, WTM, FFH:TSX, LUK, AZO, CSU:TSX
  19. Highlights some “second tier” Berkshires – Thomas Fortune Ryan, Van Sweringen brothers (Alleghany), Izaak Walton Killman, Bronfman brothers (Seagram, Brookfield Asset Management, Albert Frere (Groupe Bruxelles Lambert), AB Kinnevik, Bollore Group, Dundee Corp, First Pacific Corp.
  20. Great product and management alone is not enough for a moat
  21. Mental model – create industry map showing all the players that touch an industry
    1. Air lines example – Air Lease, Boeing, B/E Aeorspace (lessors, manufacturers, suppliers)
  22. High gross margins single most important factor for long run performance (scale and track record useful too)
    1. Stability a good indicator of an attractive company/industry (i.e., telecom, beverages)
  23. Must clearly see how and where the company adds value
  24. Good turnaround potentials typically have high gross profit margins and low operating profit margins (gpm – sg&a = opm) as cost reductions can be implemented to improve margins
  25. Don’t chase returns
  26. Boredom arbitrage – Take advantage of other people’s boredom
  27. Avoid scams – pay up for quality management
    1. Read conference call transcripts (several quarters worth to see if there are any disappearing initiatives, changes in language)
      1. Questions evaded, overly optimistic
    2. Keep management “at a distance”
  28. Extreme predictions rarely right but its those that make big money
  29. Sosnoff’s Law – best ideas often the simplest
  30. Don’t get anchored or fall in love with any idea
  31. Be suspicious of abstractions
  32. Don’t be afraid to hold cash until you find the juicy opportunity
  33. Want PEG of about 1
What I got out of it
  1. Really good read – buy right, hold on, coffee can approach, selling should almost never happen and you should think of it as a painful mistake (even if you make a profit)
Categories
Books

100 to 1 by Thomas W. Phelps

The Rabbit Hole is written by Blas Moros. To support, sign up for the newsletter, become a patron, and/or join The Latticework. Original Design by Thilo Konzok.

Summary

  1. The two reasons so few people profit from 100 to 1 stocks is that we first do not try to do so and second that even when we are wise or lucky enough to buy one we do not hold on
Key Takeaways
  1. Few ask too much from their investing – have high goals for your returns
  2. Fortunes are made by buying right and holding on
  3. 4 criteria for fast growing companies
    1. Small, sheer size militates against great growth
    2. Relatively unknown
    3. Unique product that would do an essential job better, cheaper, and/or faster than before, or provide a new service with prospects of great and long-continued sales increases
    4. It must have a strong, progressive, research-minded management
  4. Take 13F direct investing list and make that universe – take the most appealing and do deep dives to truly understand
  5. Except to learn from experience, one should never waste time looking back
  6. Stay with your investments as long as the companies are increasing their earnings
  7. Who is talking often more important than what is being said – never forget that people whose self-interest is diametrically opposed to your own are trying to persuade you to act every day. Try to identify people whose interests correspond with yours
  8. Never if you can help it take an investment action for a non-investment
    1. Stock “too high,” need the realized gains for tax purposes, stock not moving, new management, new competition…
  9. Timing not too important if find the right company
  10. Don’t have to buy small, murky stocks near the bottom to get a 100 bagger (IBM, Pfizer…)
  11. Often more profitable to ignore the market and focus on stock selection
  12. Buy a good stock (earnings, good assets that people don’t think will earn) when nobody likes it
  13. More important to be right than quick
  14. Buy right and hold on does not equal buy and forget – eternal vigilance
  15. When any rule / formula substitutes thought, discard it
  16. Must consider future size / revenues of potential 100 bagger
    1. 20% compounded over 50 years, a company must be 9,100 times as big at the end of the period as at the beginning
    2. Must evaluate the competitive status of the company not as it is today but as it will be six to eight years from now, when it is three or four times bigger
  17. For new investments, must ask, “what are my chances of making 100 for one from here?”
    1. History is of no help, only correct assumptions about the future are relevant
  18. Ignore opinions but look at assumptions, nobody knows the future
  19. Can’t compare P/E or relative P/E between different sectors
  20. The business of the stock market is to cash in on the future now
  21. Human nature one of the few constants in an ever changing world
  22. Shooting where the rabbit was is one of the most common investing errors
  23. The fact without the truth is false. Always connect
  24. Technical work only meant to supplement fundamental analysis – don’t rely on for when to trade
  25. Relative multipliers measure expectations of a particular stock
  26. Do not let your memory trump your reason
  27. Ethical approach – never do business unless trust the other party. Is the company really improving people’s lives?
    1. Like attracts like, easy to “dress up a pig”
    2. Know-how is a competition reducer – the longer it takes to learn how to do what your company is doing, the fewer competitors will be around to do it for less. Diligence and integrity also vital
    3. Beware egonomics and an aging business getting comfortable / complacent
  28. Buying power of a dollar is a measure of value, not a determinant
  29. Where to look for 100 baggers 
    1. Inventions which enable us to do things we have always wanted to do but could never do before (cars, airplane, TV, computer)
    2. New methods of new equipment for doing things we long have had to do but doing them easier, faster, or at less cost than before. Computers, earth moving machinery
    3. Processes or equipment to improve or maintain the quality of a service while reducing or eliminating the labor required to provide it (disposable syringes, frozen food, copiers  by Xerox)
    4. New and cheaper sources of energy such as oil replacing coal
    5. New methods of doing essential old jobs with less or no ecological damage
    6. Improved methods or equipment for recycling the materials, including water, required by civilized man instead of making mountains of waste and oceans of sewage
    7. New methods or equipment for delivering the morning newspapers…
    8. New methods or equipment for transporting people and goods on land without wheels
  30. 4 categories with most 100 baggers
    1. Advance primarily due to recovery from extremely depressed prices
    2. Advance primarily due to change in supply-demand ratio for a basic commodity
    3. Advance primarily due to great leverage in capital structure in long periods of expanding business and inflation
    4. Advance primarily due to the arithmetical result of reinvesting earnings at substantially higher than average rates of return on invested capital
  31. In order to get a 100 bagger in 40 years means a CAGR of 12.2%
  32. By the time the need / opportunity is clear it is already reflected in the price
  33. None sold at a high P/E when right time to buy – got earnings and multiplier gains working for them
  34. Sometimes worth selling to get into a better stock but after taxes, etc. it has to be much, much better
  35. 5 reasons why going for 100  bagger not as risky as aiming for lower returns
    1. Always a market for the best of anything – people will always pay up for quality
    2. Buying for max long-term growth avoids the pitfall of underestimating other people
    3. Time is on your side with these great companies
    4. Anyone smart enough to make a better mouse trap will get noticed
    5. Don’t buy a stock in hope that it will change, buy if you love it the way it is
  36. Good measure of success is calculating ratio of brokerage commission – net capital gain; both realized and unrealized
  37. Secret to success in 100 to 1 is to focus on earning power and  not price
  38. Every sale should be seen as admitting an error, a missed opportunity
  39. Time is an often overlooked element in value
  40. Being right too soon just as painful as being wrong
  41. Most important questions to answer when investing
    1. How much will what I expect to happen increase the status quo value of the property I am thinking of buying?
    2. How long will this take?
    3. What is the present worth of the increase I expect?
    4. How much of the expected value increase is already in the price I shall have to pay?
    5. Is there enough difference between the value increase I expect and the expected increase I have to pay for now to give me a profit I am right and a margin for error if I am wrong
  42. Nothing is cheaper or dear, except in relation to what we get for our money
  43. What makes a stock grow
    1. Reinvesting earnings at a constant or rising rate of return on invested capital, above the average of around 9%
    2. Investing borrowed money to earn more than the cost of borrowing
    3. Acquiring other companies by exchange of stock at lower P/E ratios for companies acquired than for the company acquiring them
    4. Increasing sales without having to increase invested capital – companies operating far below capacity, new methods, increasing efficiency
    5. Discoveries of natural resources
    6. New inventions, processes, or formulas for filling human needs not previously met, doing essential old jobs better, faster and/or cheaper
    7. Contracts to operate facilities for others, usually governments
    8. Rising P/E Ratios
  44. Earnings power – competitive strength (like pricing power) and is what really matters
    1. Two most important questions in buying great companies – how high and strong is the company’s moat; how good are the prospects for sales growth?
  45. P/E at time of purchase very important
  46. What mathematics cannot do, common sense often can
What I got out of it
  1. Buy right and hold on; timing not that important if have the right company; focus on potential earnings power, moat, possible sales growth