Book Review for Outlook Business : 100 Baggers ~ by Christopher Mayer
Hey! my book review of Christopher Mayer’s “100 Baggers : Stocks that return 100-1 & how to find them” now features online on Outlook Business ....just also happily observed that Stock Select for 2016 published in December 2015 is trending online as the No 1 most popular read on Outlook Business this year! ….surely because Stock Select for 2015, Shemaroo @ Rs 159 given in December 2014 has rocketed over 100% inside a year & a half to current Rs 325+ levels …quite aware that if this year’s Select does not Click in the years ahead that ‘100 baggers’ will be read without the 1!
For want of Magazine Space the book review in print is a much truncated & edited version
For Full Flavour do check out my full review produced verbatim below :
Book Review by Gaurav A Parikh, MD of Jeena Scriptech Alpha Advisors Pvt Ltd
Book : 100 Baggers ~ Stocks that return 100-to-1 & how to find them
Author : Christopher W Mayer
Publisher : Laissez Faire Books
Published in : 2015
“You make more money by sitting on your ass”
The author Chris Mayer could not have been more blunt in quoting Fund Manager, Martin Whitman
You need to Buy Right and Sit Tight for Years & Years & Years for that 100 Bagger. How do you Buy Right!? That’s the 100 Bagger Question Chris attempts to answer
My own experience of 100 Baggers leads me to pat Chris on the back. To give you some sense my three 100 Baggers Wipro, Mercator & Matrix Labs (now delisted as sold to Mylan) on which I had reinforced my credibility and standing had returned respectively 38700% inside three years, 12000% inside 5 years and 10000 % inside 4.5 years. But sadly not all took the full ride! It’s like I confess at Training Workshops is akin to Boarding a Train from Mumbai Central to Ahmedabad but getting off at Borivali!
Make no mistake! This book by Chris Mayer is not for those who seek Instant 100-to -1 multi-bagger Success by investing in Stocks. Such 100-to-1 odds are available real time at Wealth Destroying Casinos round the world!
Chris dedicates his Book to Thomas W Phelps, the first author of the first book on 100-Baggers
His inspiration to pen this book trails back a few years to a Conference in 2011 where the great Investor, Chuck Akre made mention in his address of having read in 1972 the Barron’s Reviewed Book ‘100 to 1 in the Stock Market’ by Thomas Phelps which focused on compounding capital. Legendary Investor Peter Lynch talked of ten baggers but here was Thomas Phelps talking of 100 baggers!
“The key is not only finding them, but keeping them”,“buy right and hold on”. These are nuggets Phelps summed up in his book. Phelps had added “ Investors too bite on what’s moving and can’t sit on a stock that isn’t going anywhere. They also lose patience with one that is moving against them. This causes them to make a lot of trades and never enjoy truly mammoth returns. Investors crave activity, and Wall Street is built on it. The media feeds it all, making it seem as if important things happen every day.”
Chris writes in first person and hopes his effort “will energise & excite you about what’s possible” & “you don’t need a MBA or a finance degree”
100 Baggers is a metaphor for Big Winners with Chris detailing how to spot them early on rather than be invested in sleepy stocks that go nowhere. He does admit there is no magic formula and it’s not easy to screen potential winners.
Chris’s effort is an update on Phelps book of 1972 that covered 365 stocks from 1932 to 1971 that became 100 Baggers.Chris covers 365 100 Baggers too from 1962 to 2014 reinforcing Phelps insights as well as providing new ones due to better computing horsepower
Interestingly Chris was not interested in success stories of Market Wizards like Jim Rogers, Paul Tudor or even Nicholas Darvas as he found their stories freakish and their process for enormous gains not replicable. In fact he thought one would be ruined if you followed them.He also realised that there were many ways to make money other than being just indoctrinated to the Benjamin Graham School of Value Investing best exemplified by living legend Warren Buffett
He is impressed by the great Investor, Chuck Akre who, far away from the frenetic pace of Wall Street, follows the three legged stool approach of identifying companies that always have a historical compounded value of share at high rates and who’s highly skilled management always treats shareholders as partners and most importantly & has a business that can reinvest free cash flows to earn sustained above average returns
The cornerstone philosophy for identifying 100 Baggers is to Look for Companies with sustained High Returns on Capital. As Charlie Munger of Berkshire Hathaway reiterates that even if you invest in such a Company at an expensive price it will work out fine. Conversely if you invest even at a discount in a Company consistently returning low on capital there will not be much difference in your low returns. A PEG Ratio is a handy tool to gauge if Relative Valuations are in sync with Earnings Growth
Over and above the cornerstone philosophy as above here are the 10 pearls of wisdom distilled from by Chris Mayer to invest in 100 Baggers
- Actively Look for 100 Baggers. Don’t be in Equity for Small Game. Look for the Elephant
- Look for Value added Topline Growth without any Equity Dilution or Margin Cuts that affects Return on Equity. Spend Time in understanding what you own rather than in following Forecasters and Market Analysts
- Don’t troll stocks for 100 Baggers where PE is 5 or below or where Price is below Book. Great Ideas are not always Cheap
- Look for Economic Moats that allow the Company to consistently earn High Returns on Capital. Of course such Moats can be destroyed by disruptive technologies and business being created (Uber Car Hire Aggregators ) & 100 Baggers can also be where the Company has discovered a new oil field or there’s a new drug or invention involved. Facebook, Twitter & YouTube currently enjoy Network Moats that are difficult to crack
- Look for Small to Mid Caps as at some time large nos will work against you. Apple with a Market Cap of @ US $ 750 billion is already a 100 Bagger. From here to become a 100 Bagger again it needs to go to US $ 75 Trillion which is four times the US GDP. Unlikely
- Prefer Owner-Operator Companies as what’s good for them is good for you & vice-versa
- Adopt the Coffee Can Approach for a part of your portfolio to stay Invested for at least 10 years and not be tempted to sell or act frequently
- Create a Good Filter so as not to get distracted by daily Volatility and macro happenings that force you to act impulsively or in haste. Monster Beverages showed several monthly drops and rises in excess of 20% and yet kept the annual march upward. Such Volatility would have forced you to act and sell out and therefore miss out on a 100 Bagger Idea. Also the Index is not relevant to finding great stocks to invest in unless you’re buying the Index
- Good Luck Helps
- Buy Right & Sit Tight. Be a reluctant seller to allow the magic of compounding to do its work
Your Real Test of Conviction and Temperament comes when you’re holding a Stock that appears to have gone bad but then goes on to become a huge Bagger. Warren Buffett’s Berkshire Hathaway has been referred to in the Book to emphasise this and much more. It rose from US $8 in 1962 to US $80 in 1972. Impressed and well advised by a friend, one picked it up at US $80 only to see it sink 53% to US $38 by 1975 while the S & P 500 had dropped only 14%. One would have dumped it and cursed the friend! However in 1976 it rose from US $38 to US $94 and by 1982 it was US $775 on it’s way to levels of over US $220000 now ! In fact from 1965 its risen 18000 fold with US $10000 becoming US $ 180 million in 50 years. Chris refers to a new interesting book by Elena Cherkova on this phenomenon & her reasoning that it was the 37.5% leverage on capital through Insurance Float that remains the key as it leads to effectively borrowing at negative rates of interest when Premiums exceed the Claims & the gains on investing the Float are yours to keep.
Apple too was a 225 Bagger from it’s IPO in 1980 to 2012 but the ride was not easy. Those who held on had to suffer through a peak-to-trough loss of 80 percent — twice! The big move from 2008 came after a 60 percent drawdown. And there were several 40 percent drops.
Chris highlights the Coffee-can Portfolio Approach to protect the Investor from himself and to resist selling to accumulate fortunes and not be worried about ticker tapes and anxious moments watching blinking stock terminals and ups and downs in the market and sweating day to day or month to month on your portfolio value. Pick a compelling story or Leader or Country and be willing to risk it all in your Coffee Can. Chris illustrates this with how in 1987 equal amounts were invested in hi-tech and bio-tech companies that held great potential. However 9 sunk and only Amgen returned 800 times the Investment made by 1994 but made up for more than the loss in the other 9!Chris though recommends not to experiment with start-ups but rather focus on well established companies with long runaways of growth and ability to keep compounding capital at high rates.
The Twin Engines are Growth in Business & Market Multples to become 100 Baggers. It’s also about what not to be buying like Utilities and Long Mature Companies like McDonalds and WallMart that will take a lot of years if at all they do become 100 Baggers.
Great Investors do not worry or spend time on what is unknowable or unpredictable like the Fed Rate or US $ or overall state of markets.They focus on great opportunities.
Chris’ study of the 365 Companies that became 100 Baggers from 1962 to 2014 revealed that they spread over several sectors from beverages to retailers to tech firms and took an average of 26 years to become 100 baggers. However the Fastest 10 that became 100 Baggers did so from 4.2 years to 7.3 years were largely tech,media and pharmaceutical companies. Also the Median Sales was US $ 170 m while Median Market Cap was US $ 500 m. Price to Sales Ratio was thus around 3 which is not really cheap. The myth that one needs to invest in a tiny company to get a 100 Bagger was dispelled as was not mandatory to look for low Price to Sale Ratio Companies to identify winners.
Chris covers several individual success stories.Monster Beverages stands out. It became a 100 Bagger inside 10 years by 2006 and a 700 Bagger by 2014.In fact one could have even bought it in 2004 and would have got a 100 Bagger. This was despite it being shunned by many well known analysts.One even recommended a Short in 2005 at US $ 6.31. It went on to hit US $ 26 inside a year! One was best served by not following analysts for this Stock! The Dramatic rise was due to brilliant marketing,branding and distribution strategies that surged the topline and led to increased profitability on account of both volume and margin growth. What inevitably followed was a re-rating of Earnings Multiples on Stock Market Quotes. Interestingly Monster never really got very expensive as it’s PE & Earnings Growth were largely in sync year on year.
Amazon is another Interesting Case Study. It was available at just US $ 1.50 in 1997 when it began to be quoted. It became a 100 Bagger inside two years by 1999 when it hit US $ 221 only to be destroyed inside the next two years by the dot.com bust to sink back into single digits by 2001.It took 10 years from there to become a 100 Bagger again. Chris & his team of analysts argue that Amazon yet holds great promise with internet sales rising from sub 2% of retail sales in 1997 to @ 9% currently and potential of 35% seen in the coming years. The Founder,Jeff Bezos is very clear that value of the business is future cash flows discounted to the present and that focus should be on correct allocation of capital and return on invested capital. On first look it appears Amazon is not doing well till you add back the R & D Expenses that are more in the nature of Investments and can be argued need to be capitalised.For instance 2014 Sales were US $ 89 billion while Operating Profit was just US $ 179 million.However R & D was a mammoth US $ 9.27 Billion and when added back give over 10% Operating Margin. Market Leadership is important says Bezos.
It also covers the rationale of Betting on Billionaries like Steve Jobs of Apple or Bill Gates of Microsoft or Warren Buffett of Berkshire Hathaway and even the new upcoming ones. It’s the argument of Owner-Operators vs Agent-Operators and how the former demonstrate abilities to make deals when others are afraid while the latter are loathe to spend cash and prefer to take on less debt.
If you believe, like I do, that India stands out currently in the Global Economy as a great Investment Destination for the decades ahead and act on this conviction after applying a lot of the insights from this book ,I assure you ,you’ll be writing out your own 100 Bagger Stories.
Just Invest Right & Sit Tight!
Learn from ‘100 baggers’ so you can live them!
A word of caution though …sitting tight can also cost you like once Blue chip Kodak did! & what with disruptive technologies being born every day.
It takes more than just Security Analysis. It takes Conceptual Power in what a Business can achieve & how big it can get.
Who said 100 baggers come Cheap!