Motilal Oswal’s 19th annual wealth creation study titled: “100x: The Power Of Growth In Wealth Creation” by CSInvesting
100x: The Power Of Growth In Wealth Creation
- 100x stocks are few. Finding them requires “vision to see, courage to buy, and the patience to hold.”
- Value migration offers the most predictable 100x opportunities.
- The 100x process is captured in SQGLP – Size, Quality, Growth, Longevity and Price.
- “In evaluating a common stock, the management is 90%, industry is 9%, and all other factors 1%.” (Phil Fisher)
- Quality does not guarantee growth, and in turn, rapid longterm Wealth Creation.
“To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them. Patience is the rarest of the three.” — Thomas Phelps in 100 to 1 In The Stock MarketSeth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Wealth Creation Study – Objective, Concept & Methodology
The foundation of Wealth Creation is to buy businesses at a price substantially lower than their “intrinsic value” or “expected value”. The lower the market value compared to the intrinsic value, the higher is the margin of safety. Every year for the past 19 years, we endeavor to cull out the characteristics of businesses, which create value for their shareholders.
As Phil Fisher says, “It seems logical that even before thinking of buying any common stock, the first step is to see how money has been most successfully made in the past.” Our Wealth Creation studies are attempts to study the past as a guide to the future, and gain insights into the various dynamics of stock market investing.
Concept & Methodology
Wealth Creation is the process by which a company enhances the market value of the capital entrusted to it by its shareholders. It is a basic measure of success for any commercial venture. For listed companies, we define Wealth Created as the difference in market capitalization over a period of last five years, after adjusting for equity dilution.
We rank the top 100 companies in descending order of absolute Wealth Created, subject to the company’s stock price at least outperforming the benchmark index (the BSE Sensex in our case). These top 100 Wealth Creators are also ranked according to speed (i.e. price CAGR during the period under study).
Wealth Creation 2009-2014 – Findings Summary
TCS is the Biggest Wealth Creator again
- TCS has emerged the biggest Wealth Creator for the period 2009-14, retaining the top spot it held even for the period 2008-13.
- The performance in the latest period is better than the previous one with Wealth Created at INR3.6 trillion v/s INR2.3 trillion over 2008-13. This is the highest ever wealth created in any 5-year period in India’s stock market history.
- On the back of 29% PAT CAGR over 2009-14, TCS stock has delivered 51% price CAGR for the same period, and is currently India’s largest company by market cap.
Eicher Motors is the Fastest Wealth Creator
- Eicher Motors has emerged the Fastest Wealth Creator during 2009-14, with Price CAGR of 94%, marginally higher than 93% for Bajaj Finance.
- Eicher, Supreme Industries and Page Industries are among the 10 Fastest Wealth Creators for the last 3 studies in a row.
- HCL Technologies enjoys the unique distinction of being in the top 10 of both the Biggest and the Fastest Wealth Creators.
- 7 of the top 10 Fastest Wealth Creators had single-digit INR billion market cap in 2009 and/or were quoting at single-digit P/Es.
Kotak Mahindra Bank is the Most Consistent Wealth Creator
- Kotak Mahindra Bank is the Most Consistent Wealth Creator over 2004-14, by virtue of: (1) Appearing among top 100 Wealth Creators in each of the last 10 studies; and (2) Highest 10-year Price CAGR, marginally ahead of Asian Paints and Sun Pharma.
Technology re-emerges as the largest ever Wealth Creating sector
- After a 9-year holiday post 2004, Technology has re-emerged as India’s largest Wealth Creating sector. (It was the largest Wealth Creator for 4 consecutive years 2000 to 2004.)
- Ironically, Oil & Gas is one of the lowest Wealth Creating sectors over 2009-14, with its share of Wealth Created collapsing to 1% v/s 22% in 2009.
PSUs’ decade of decline: Wealth Creation hits rock bottom
- The number of PSUs in the top 100 Wealth Creators is at an all-time low of only 5.
- The Wealth Created by these 5 PSUs is also at an all-time low of just 2% of total, from as high as 51% over 2000-05, signaling total value migration to the private sector.
Overall level of Wealth Destruction eases; will the tide turn?
Most of the Wealth Destroying companies and sectors are deeply cyclical and/or those affected by policy paralysis during UPA-2 regime. With a new government at the helm, major policy reforms coupled with economic recovery, could be hugely positive for many of them.
100x: The power of growth in Wealth Creation – Theme 2015
This report would most likely have been titled “Demystifying growth” … and then we came across this book “100 To 1 In The Stock Market” by Thomas W Phelps who is described as having been a private investor, columnist, analyst, author and financial advisor.
Written in 1972, the book makes a strong case for investors to “Buy right and hold on”. It offers examples of how in the US, over 365 stocks appreciated 100x or more over the 40 years ending 1971. We believe “100 to 1” is an excellent concept to apply our understanding of growth.
The “100 To 1” book is common sensical, conversational, and chucklesome (Sample this: “Unlike dogs, not every stock has its day. In fact, in Wall Street, a stock that does not have its day is called a dog!” And this: “Most deception is bad but self-deception is worse because it is done to such a nice guy!”)
We dedicate “100x” as a contemporary complement to this classic, and as our commemorative compliment to the late author (who passed away in November 1992 at the age of 90.)
1. What is 100x?
Opening the mind to the magic of long-term growth investing
To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them. Patience is the rarest of the three. — Thomas Phelps in 100 to 1 In The Stock Market
For the purposes of this report, “100x” refers to stock prices rising 100-fold over time i.e. “100-baggers” in stock market jargon. Both the short words here are important – “100-fold” and “over time”.
1.1 “100-fold”: Accumulating massive purchasing power
The precise number of “100” is not as important as the fact that 100x opens the mind to the concept of long-term power of compounding in equity investing. Warren Buffett describes investing as the process of gaining higher purchasing power over time (i.e. net of inflation and taxes). In fixed income investing, the average annual post-tax return works out to about 7%. If the same is reinvested, over 20 years, the security would be worth about 4x its original value. Now, if inflation also turns out to be 7%, then at the end of 20 years, there is zero increase in purchasing power. Even if inflation is somewhat lower at 5%, it erodes 2.7x of the 4x final value, leaving a net purchasing power of only 1.5x (i.e. 50% higher over 20 years or 2% per annum).
In contrast, an equity stock rises 100x, say, in 20 years (in select cases, it takes much less time). Now, at 7% inflation, this 100x is tantamount to purchasing power of 26x (i.e. 100÷3.9), and at 5% inflation, 38x (i.e. 100÷2.7). Thus, the 100x approach in equity investing is an excellent way to accumulate massive purchasing power for a very long period of time.
1.2 “Over time”: Earlier the better
Very few investors even conceptualize their equity investment multiplying 100 times. Even fewer actually experience a 100-fold rise in the price of their stock(s). This is because such 100-fold rise may take longer than 3, 5, or even 10 years’ time. And holding on to stocks beyond that period requires patience which, as the quote above aptly puts it, “is the rarest of the three” qualities, the other two being vision and courage.
Irrespective of whether investors think of it or not, stock price rising 100-fold has very little meaning without bringing in the context of time. This is because equity investors are keen that they make absolute gain (i.e. “how much”) in the shortest possible time (i.e. “how soon”). The charts below make this point amply clear.
Going by Exhibit 1, if 100x takes 50 years, the effective annual return is only 10%, if 40 years 12%, and so on. In the Indian context, the long-period return of the benchmark indices is ~17%. Thus, if a stock takes more than 30 years to rise 100-fold, it would most likely end up underperforming the market. Given this, even those investors with long-term outlook and patience should reject such slow-growth 100x ideas.
We postulate (and later even prove arithmetically) that the single-most important time determinant of stock market return is GROWTH in all its dimensions – sales, margin and valuation. And once having gained insightful understanding of growth, especially long-term growth, 100x is arguably its best application.
As in the US, real-life experience in India also suggests that the task of finding 100x stocks is indeed difficult but not impossible. Once sensitized to such a possibility and armed with the right framework, investors may find the challenge of unearthing the next 100-bagger more joyous than arduous.
See full PDF below.