A Review Of 100 Baggers: Stocks That Return 100-To-1 And How To Find Them by Ankur Shah, Value Investing India Report
Chris Mayer the editor of Mayer’s 100x investment newsletter is the author of 100 Baggers. The purpose of the book is to help you identify stocks that return $100 for every $1 invested. To be clear, a 100-bagger equates to a 9,900% return on your capital. Logically, you may be asking over what time frame. I’ll get to that point later. However, I want to first emphasize that Mayer was able to identify 365 stocks that achieved 100-bagger status, assuming reinvestment of dividends, from 1962-2014 in the US equity market. Certainly, it’s not a huge number but the list is big enough to make you feel confident that maybe you could have identified one or two of these stocks before they made their ascent to 100-bagger status. After reading the book, you even come away with the feeling that you’ve been limiting yourself and your portfolio. If for no other reason, you should, at least, read the book to get a sense of what is possible with the combination of the right business and the power of compounding. Mayer was originally inspired to write the book after reading 100 to 1 in the Stock Market by Thomas Phelps. My Indian readers will probably recognize the book title. It’s the same book that Professor Sanjay Bakshi made a “Strong Buy” recommendation on back in February 2015.
Qualivian Investment Partners Up 30% YTD; Long ORLY Thesis
Qualivian Investment Partners commentary for the second quarter ended July 30, 2020. Q2 2020 hedge fund letters, conferences and more “Short-term investors will accept a 20% gain because they didn’t spend the time to develop the conviction and foresight to see the next 500%.” - Ian Cassell Executive Summary Readers of investment letters fall into Read More
— Sanjay Bakshi (@Sanjay__Bakshi) February 19, 2015
Why is 100 Baggers different?
Unlike many books on investing that deal primarily with theory, 100 Baggers focuses on practical techniques that you can use in your own portfolio. Obviously, not every investment you make can turn into a 100-bagger. However, by seeing what is possible, you can adjust your goals higher. Even if you make slight adjustments such as increasing your investment time-frame or looking for high return on capital stocks, you’ll undoubtedly experience better results. The author of the book doesn’t provide you with a set of statistical inferences. Instead, he provides a set of principles that you can use to identify stocks that will have the potential to compound your wealth over the long-run. There is an interesting table in the early part of the book that displays how much and for how long a stock must compound to multiply a hundredfold. At a 20% annualized rate of return, it would take 25 years. With holding periods for most stocks now measured in weeks and months, it’s probably unfathomable to most investors to hold a stock for that long. However, that’s exactly the point. Huge returns are available to you as a private investor if you just have the patience to hold on to the right company.
In the book, Mayer cites George F. Baker who stated the following:
“To make money in stocks you must have ‘the vision to see them, the courage to buy them and the patience to hold them.’”
Of the three qualities mentioned by Baker, patience is probably the hardest to maintain. I think the majority of investors could significantly improve their results simply by expanding their investment time-frame. In a sense, the entire book is a treatise on taking the long view when it comes to investing. In fact, it’s not only good advice for your portfolio but also your life in general.
What are the three most important ideas?
In order to identify 100-baggers, you need to spend your valuable research time looking for them. It’s the same idea that Charlie Munger conveyed to Buffett. Don’t waste precious time looking for “cigar butt” companies that will only provide a one-time pop as market value finally catches up with intrinsic value. Following a traditional “net-net” value investing approach as popularized by Ben Graham, results in constant churn in your portfolio. You must constantly replace stocks that have reached or are near their intrinsic value with stocks that are trading at a greater discount. By focusing solely on stocks that are cheap based on short-term accounting metrics such as price-to-book or price-to-earnings, you’ll be prone to overlook stocks that have the potential to become 100-baggers. Real wealth is generated by identifying the companies that will compound your capital over the long-run.
Unlike traditional value investing, where cheap valuation takes precedence over the quality of the business, you can’t become overly fixated on paying low multiples. The likely outcome will be that you pass up on a number of highly profitable opportunities because you were adamant about paying a cheap price. In the book, Chris Mayer states the following: “Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs as you’d expect. It is rare to get a truly great business at dirt-cheap prices. If you spend your time trolling stocks with price-earnings ratios of five or trading at deep discounts to book value or the like, you’re hunting in the wrong fields – at least as far as 100-baggers go. You may get lucky there, of course, but the targets are richer in less austere settings.”
If order to find a 100-bagger you must look for businesses with economic moats. You need to find businesses with structural advantages that make it extremely difficult for competitors to take market share and virtually impossible for new companies to enter the industry. Essentially, you need to find companies that can earn high returns on invested capital for long periods of time. Generally, businesses that have high returns on capital tend to focus on a specific niche that makes direct competition difficult. However, there is usually a trade-off between having a niche focus and growth opportunities. The ideal company will have ample growth opportunities within its core business or related markets.
Is the book worth reading?
In my view, 100 Baggers captures the essence of the current investment methodology pursued by Charlie Munger and Warren Buffett. Although the book is not explicitly about either investor, you’ll find core concepts held by both expounded upon throughout the book. For example, the importance of finding businesses with economic moats or that achieve high returns on invested capital. This serves to further support my belief that the core principles of successful investing are immutable and timeless. Whether you’re actively searching for 100-baggers or just want to improve your investing results, I think Chris Mayer’s book will help you achieve both goals. In many ways, 100 Baggers is much more accessible and lucid than its predecessor 100 to 1 in the Stock Market. Ultimately, I think it deserves a prominent spot on your investing bookshelf.
100 Baggers: Stocks That Return 100-to-1 and How To Find Them by Christopher W. Mayer