100 Baggers

 𝗔 𝗖𝗼𝗻𝘃𝗲𝗿𝘀𝗮𝘁𝗶𝗼𝗻 𝘄𝗶𝘁𝗵 𝗖𝗵𝗿𝗶𝘀 𝗠𝗮𝘆𝗲𝗿 –Moderated by prof. Sanjay Bakshi.

He talks about focusing illusion –whatever you are looking or thinking at the time has outsize support in your mind comes. Prof. Bakshi brings up a few questions from Chris Mayer’s book 100 Baggers.

The idea of missing good businesses due to prejudices like buying automobile companies vis a vis Ferrari case study. RoE and RoIC, which can be inflated artificially to choosing high quality and reinvestment oriented businesses. To get a better grasp upon the ideas of Chris Mayor, you can give his book 100 Baggers a read. I have tried to summarize the 200 page book in less than 1500 words -

Divided into 15 chapters, Chris tries to bring out a pattern in 100 Bagger case studies. Taking inspiration from 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities by Thomas Phelps, Chris takes up this idea, studied 365 stocks and their journey to turn into 100 baggers over 1962 to 2014. He takes up the idea to decipher the common pattern and let compounding do its magic.

Chapter 1 Introducing 100 Baggers. It summarizes the recipe for 100 Bagger stocks. Chris explains how 100 bagger are made – If you compound 20% a year and you do it for 25 years = 100 bagger. The hardest part is holding that company for an extended period of time

“The greatest fortunes come from gritting your teeth and holding on. Ownership of assets is your best long-term protection against calamity.”

Chapter 2 Anybody can do this and Chapter 3 The Coffee Can Portfolio- From Chris Mittleman’s Berkshire to Robert Kirby’s Coffee Can(The idea is simple: you find the best stocks you can and let them sit for 10 years), Voya Fund’s (The founders of the Trust bought equal shares of 30 leading companies in 1935 and decreed they could never be sold. The only exception was companies that went bankrupt, merged or spun off) out performance to MIT’s demise. Chris highlights the importance of holding the assets for an extended period of time.

“The biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.”

Chapter 4- Four studies of 100 Baggers collects the ingredients required to cook 100 baggers with P/E (broken down as price and earnings  as well as when seen apiece) being one of the key component. Four cases studies (Monster Beverage, MTY Foods, Motilal Oswal’s 100x and  tracks the price and earnings growth to bring up P/E expansion. Towards the end, Chris uses Heiserman’s work to put up the limitations of looking at earnings in solitude.

“The truly big return comes when you have both earnings growth and a rising multiple.”

“Investing is a reductionist art, and he who can boil things down to the essential wins.”

Chapter 5 The 100-Baggers of the Last 50 Years presents the list of hundred baggers in last 50 years. The time on average companies took to become 100 baggers was about 26 years. To deduce a pattern common amongst them, a bunch of case studies are used. Case Studies – Monster Beverages, Amazon, Electronic Arts, Comcast, Pepsi, Gillette, used to show the power of high sales growth and earnings landed them in 100Baggerdom.

Chapter 6  Key to 100 Baggers talks about the importance of RoE and its impact in share price in the long run. The return of a stock and its ROE tend to coincide quite nicely. Many 100-baggers enjoyed high ROEs, 15 percent or better in most years. To reinvest its profits at a high rate - ROE is a good starting point and decent proxy.

Chapter 7 Owner- Operator: Skin in the Game brings in the role of management and skin in the game. It starts with explaining the ETF bubble – dumping of the shares by insiders as ETF brings in adequate liquidity. Chris cites a few researches to show the general outperformance of high stake operators or owners running the business themselves. It serves as a crucial checkpoint to flag the company as 100 bagger candidate.

Chapter 8 The Outsiders: The Best CEO’s. Citing objective parameters from The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, by William Thorndike, puts up the case studies of 100 bagger companies and their CEO’s using simple focused methods.

“Capital allocation is the CEO’s most important job.”

Chapter 9 Secrets of an 18,000-Bagger, an entire chapter covering Berkshire Hathaway, its 18000x returns and Warren plus Charlie. The high leverage funded using insurance float – and a negative cost of borrowing in 29 out of 47 years. The latter part of chapter tries to put up the idea of Berkshire for next 20 years.

Chapter 10 Kelly’s Heroes: Bet Big examines the idea of portfolio concentration using the Kelly’s criterion (bet big on your best ideas). It is based on odds, edge and chances of winning the bet.

f = edge/odds

f is the percentage of your bankroll you bet. Edge is the profit divided by the size of wager.

Chapter 11 Stock Buybacks: Accelerate Returns on stock buybacks and its impact on share price. As a company buys back shares, its future earnings, dividends and assets concentrate in the hands of an ever-shrinking shareholder base. More on it can be read from Warren Buffett’s letter to shareholders blog.

Chapter 12 Keep Competitors Out describes “moat”, one of the most important ingredient to make 100 baggers. It highlights a few of the moats like lowest cost producer, widespread network, strong brand presence, high switching cost, monopoly businesses, high gross margins etc. and supporting case studies to rest the points. The works of Pat Dorsey (The Little Book That Builds Wealth) and Michael Mauboussin (“Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation”) quite comprehensively explain “moats”.

Chapter 13 Miscellaneous Mentation on 100-Baggers. This chapter fetches a variety of investing ideas so as to adopt the much needed 100-bagger mindset. What not to do matters more like not to chase returns, not to trade out of boredom, avoid scams. The latter part of the chapter covers Mr. Carson Block’s presentation where he talks about management and the role of economists and analysts in the markets.

“Investing for 100-baggers means you have to plant your feet firmly in the ground and stand still.”

“People tended to forecast a future that closely approximated the present. Reality was much more volatile. Forecasters face many surprises. Extraordinary performance comes only from correct non-consensus forecasts.”

Chapter 14 In Case of the Next Great Depression talks about the investment approach in case of depression. Using John Maynard Keynes Chest Fund journey, to Floyd Odlum’s way, and John Dix’s advice it guides the readers on what to do during tough times.

Picking the Chest fund first - The fund averaged 12 percent per year from 1927–1946 (it included the Great Depression and World War II.)Low churn, a few stocks, price below intrinsic  value, and a balanced investment position (to control risk) sums up his investment approach. The latter part of the chapter describes the importance of cash and cash equivalents during tough times. Though tough to time the market but having a cushion to protect yourself comes handy during rough days.

“Cash means you have options and you are not reliant on fickle lenders.”

“Slumps are experiences to be lived through and survived with as much equanimity and patience as possible.”

Chapter 15 100-Baggers Distilled: Essential Principles summarizes the whole book using 10 objective points. It starts with describing Akre’s three legged stool approach to invest (high historic returns, reinvestment moat and managed with high skills and integrity.) Simple yet not so easy practices comprehended in 10 points to look at in your 100 baggerdom candidate. Growth and its intricacies, reverse thinking,  PEG, moats, small caps, owner as operator, role of luck and when to sell.

Case Studies - General Finance (GFN), MTY Foods, Apple, Monster Beverage

“You want to find a business that has lots of room to expand—it’s what drives those reinvestment opportunities.”

“Just because a stock market index, such as the S&P 500, is pricey doesn’t mean you should give up on stocks. Once they got hold of a good thing, they held on and allowed the magic of compounding to do its work.”

“The only ultimately rational attitude is to sit loosely in the saddle of life and to come to terms with the idea of chance as such.”

Some key takeaways for me includes Akre’s three legged approach, average asset life, conviction to hold, odds in extraordinary predictions, Kelly’s Bets, Heiserman’s deductions on earnings and Chest Fund’s way to resilience. The book collects a lot of resources together to bring up the information and collate the facts to knit the story quite lucidly.