100 Baggers: Stocks that Return 100-to-1 and How to Find Them by Christopher W. Mayer (Summary)

“In this concise summary of 100 Baggers, you will discover my essential takeaways organized chronologically, designed to save time and serve as a convenient reference for future use. When relevant, I include a personal note to express my opinion or key take-away from the text, adding a personalized touch to the summary. To dive deeper into the complete book, I have provided an affiliate link to Amazon, where you can effortlessly purchase it for global delivery.” – Jeroen Snoeks.

How “100 Baggers” Broadened My Perspective

The great advantage of reading investment book classics such as “100 Baggers” is that the same investment principles keep popping up throughout these books – and this book sums up these principles perfectly! Consequently, your focus should be directed towards companies that consistently generate high returns and possess the ability to consistently reinvest these earnings at a noteworthy rate. Equally important is acquiring these companies at a fair or discounted value, rather than an overly inflated one.

In the following sections, I’ve detailed my key takeaways from each chapter in the same order they appear in the book. This structure should make it easier for you to cross-reference any particular chapter if you decide to delve deeper into the subject matter.

Chapter 1: Introducing 100-Baggers

This book is inspired by the book: “100 to 1 in the Stock Market” by Thomas Phelps. According to Phelps “Every human problem is an investment opportunity if you can anticipate the solution.” His basic conclusion: “buy right and hold on to counter unproductive activity.” Thus, focus on the power of compounding. He also advices to sell rarely, and only when it is clear you made an error. “One who buys right must stand still in order to run fast”.

Phelps advices looking 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.

Chapter 2: Anybody Can Do This: True Stories

Invest in long term enterprises which have the potential to vastly outpace other companies and industries and stick with them as long as the theme is in tact.

What you need to learn is how to buy right and then hold on.

Chapter 3: The Coffee-Can Portfolio

A nice metaphor to protect you against yourself. Don’t put anything in your “coffee-can” you don’t think is a good 10-year bet.

The establishment doesn’t want you to just sit on carefully chosen stocks. It wants to sell you stuff.

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.

You don’t have to put all your money in a coffee-can portfolio. You just take a portion you know you won’t need for 10 years. (The author bets the final results will exceed those from anything else you do.)

The author recommends to read Hedgehogging by Barton Biggs, a book about preserving wealth during calamities (spoiler: Biggs recommends to put at least 75% of your wealth in stocks).

Chapter 4: Studies of 100-Baggers

An Analysis of 100-Baggers by Tony at TS Analysis

You can find the complete report free online. He drew the following four conclusions:

  1. The most powerful stock moves tended to be during extended periods of growing earnings accompanies by an expansion of the P/E ratio.
  2. These periods of P/E expansion often seem to coincide with periods of accelerating earnings growth.
  3. Some of the most attractive opportunities occur in beaten-down, forgotten stocks, which perhaps after years of losses are returing to profitability.
  4. During such periods of rapid share price appreciation, stock prices can reach lofty P/E ratios. This shouldn’t necessarily deter one form continuing to hold the stock.

Look for business that generate high profits and are able to reinvest those profits in their business. Growth in earnings and a higher P/E ratio are the “twin-engines” of 100-baggers.

Motilal Oswal 100x

Published in December 2014 and focused on Indian stocks, this study suggest that 100x stocks have the following traits in common, forming the acronym “SQGLP”:

  • S – Size is small
  • Q – Quality is high for both business and management
  • G – Growth in earnings is high
  • L – Longevity in both Q and G
  • P – Price is favorable for good returns

In this free online report they conclude it is management alone which is the 100x alchemist. “And it is those who have mastered the art of evaluating the alchemist that the stock market rewards with gold.”

10x Return Stocks in the Last 15 Years by Kevin Martelli

Quote from George F. Baker, mentioned in Thomas Phelps’s book “100 to 1 in the Stock Market”: “To make money in stocks, you must have the vision to see them, the courage to buy them and the patience to hold them. According to Phelps, “patience is the rarest of the three.”

Some conclusions of Martelli’s study:

  • There is no magic formula to find long-term multi-baggers.
  • A low entry price level, relative to the company’s long-term profit potential is critical.
  • Small is beautiful: 68 percent of multi-baggers in the selected sample were trading below a $300 million market cap at their low.
  • Great stocks often offer extensive periods during which to buy them.
  • Patience is critical.

The author added that the stocks had top-management teams that made good capital decisions about how to invest company resources. There was often a large shareholder or an entrepreneurial founder involved.

Ben Graham and the Growth Investor by Hewitt Heiserman Jr.

Heiserman recognized the following attractions of investing in a powerful grower and sitting on your investment:

  • You can defer capital gains.
  • You can trade less (and thus spent less on transaction costs).
  • You don’t have to worry about “timing”.

The truly big returns comes when you have both earnings growth and a rising multiple. However, it all starts with the price paid.

Heiserman shows the following four traps that earnings alone has it’s limitations:

  1. Earnings omits investment in fixed capital, so when capital expenditures are greater than depreciation, the net cash drain is excluded.
  2. Earnings omits investment in working capital, so when receivables and inventory grow faster than payables and accrued expenses, the net cash drain is excluded.
  3. Intangible growth-producing initiatives, such as R&D, promo/ advertising and employee education are expenses (i.e. not investments), even though the benefits will last for several accounting periods.
  4. Stockholders’ equity is free even though owners have an opportunity cost. (In other words, companies can spend $50 to create $1 in earnings. If all you look at is earnings per share, then you will ignore the cost to generate those earnings.)

Conceptual power is more important. There is no amount of security analysis that is going to tell you a stock can be a 100-bagger. It takes vision and imagination and a forward-looking view into what a business can achieve and how big it can get.

Chapter 5: The 100-Baggers of the Last 50 Years

If you buy a stock that returns about 20 percent annually for 25 years, you’ll get your 100-bagger. But if you sell in year 20, you’ll get “only” about 40 to 1 – before taxes!

Finding what will become a 100-bagger is as much about knowing what not to buy (at current prices) as it is what to buy.

The 100-bagger population seems to favor no particular industry.

The author analyzed 365 100-baggers and found that the median sales figure at the start was ~$170 million and the median market cap was ~$500 million. Thus, at the start of their journey to become a 100-bagger, these companies traded at a Price to Sales Ratio of around 3, and they were not considered as microcaps.

If you have a (new) brand that catches on, grows, and hits scale, the costs start to slowly unwind. This extra margin can lead to a spectacular rise in a company’s share price.

You ought to prefer to pay a healthy price for a fast-growing, high-return business (such as Monster) than a cheap price for a mediocre business. To illustrate this, Peter Lynch used the following example in his book “One Up on Wall Street”.

All else being equal, a 20 percent grower selling at 20 times earnings (a P/E of 20) is a much better buy than a 10 percent grower selling at 10 times earnings (a P/E of 10).

Company A (20% earnings growth rate)Company B (10% earnings growth rate)
Base Year$1.00$1.00

Personal note: As I have also written down and summarized my key-takeaways from One Up on Wall Street, you can read my notes in the Investment Book section on UndervaluedEquity.com too.

As Phelps reminds us, “good stocks are seldom without friends”. Hence, they are rarely cheap in the usual sense. Don’t let a seemingly high initial multiple scare you away from a great stock.

Chapter 6: The Key to 100-Baggers

“If a business earns 18% on capital for 20 to 30 years, even if you pay an expensive looking prive, you’ll end up with a fine result.” – Charlie Munger

According to Jason Donville from Donville Kent Asset Management: “Over time, the return of a stock and its ROE tend to coincide quite nicely.” Donville is always looking for companies who earn ROE’s of minimal 20 percent and trade at a fair price. He writes a quarterly letter called the ROE Reporter about (mostly) Canadian stocks who meet his criteria.

Donville is inspired by the “second version” of Warren Buffet. In the beginning of Buffet’s career, he is more classified as a Benjamin Graham-style value-investor, who focusses on short-term accounting metrics (low price-to-book, low price-to-cash flow, low price-earnings). In it’s second version, after he teamed up with Charlie Munger, he focuses more on future cash flow. Therefore he chooses to only invest in companies he can understand to be able to project where earnings are going.

According to Donville, if a company has a high ROE for four or five years in a row – and earned it not with leverage but from high profit margins – that’s a great place to search for companies for your portfolio. In addition one should focus on the capital allocation skills of the management team, as you want to continue to earn a 20 percent ROE.

Donville generally only sells if the ROE falls below 20 percent, or if the valuation get stupid.

Chapter 7: Owner-Operators: Skin in the Game

Peter Doyle, a money manager at Horizon Kinetics, concluded: “Owner-operators, over an extended period of time, tend to outpace the broad stock market by a wide margin”. Further studies on this topic include:

  • Joel Shulman and Erik Noyes (2012) looked at the historical stock-price performance of companies managed by the world’s billionaires. They found these companies outperformed the index by 700 basis points (or 7 percent annually).
  • Ruediger Fahlenbrach (2009) looked at founder-led CEOs and found they invested more in R&D than other CEOs and focused on building shareholder value rather than on making value-destroying acquisitions.
  • Henry McVey and Jason Draho (2005) looked at companies controlled by families and found they avoided quarterly-earnings guidance. Instead, they focused on long-term value creation and outperformed their peers. In the pursuit of 100-baggers, it helps to back talent. Think about finding people who might be the next Jobs, Buffet or Icahn. Many of the best-performing stocks of the past 50 years had such a key figure for at least part of their history.

Chapter 8: The Outsiders: The Best CEOs

According to the highly recommended book The Outsiders: Eight Unconventional CEO’s and Their Radically Rational Blueprint for Success, by William Thorndike, you have to look for a CEOs who are great capital allocators, or great investors.

According to Thorndike, each CEO understood that:

  • capital allocation is the CEO’s most important job;
  • value per share is what counts, not overall size or growth;
  • cash flow, not earnings, determines value;
  • decentralized organizations release entrepreneurial energies;
  • independent thinking is essential to long-term success;
  • sometimes the best opportunity is holding your own stock; and
  • patience is a virtue with acquisitions, as is occasional boldness.

Personal note: As I have already written The Outsiders, you can expect to find my key-takeaways in the Invest Book Summary section in due time.

Chapter 9: Secrets of an 18,000-Bagger

“If people weren’t so often wrong, we wouldn’t be so rich.” – Charlie Munger

Berkshire Hathaway has risen more than 18,000-fold, which means $10,000 invested in 1965 turned into $180 million 50 years later.

According to “The Warren Buffet Philosophy of Investment”, by Elena Chirkova, Buffet and Munger realized this return with one key point most people overlook – Berkshire’s use of leverage (from the insurance float). Most people know Buffet invested the float. If premiums exceed claims, then Buffet effectively borrowed money at a negative rate of interest. He kept all the profits and when he repaid the money (by paying claims), he often paid back less than he borrowed.

Chapter 10: Kelly’s Heroes: Bet Big

“I can’t be involved in 50 or 75 things. That’s a Noah’s Ark way of investing – you end up with a zoo that way. I like to put meaningful amounts of money in a few things.” – Warren Buffet

“Be not tempted to shoot at anything small.” – Thomas Phelps

Chapter 11: Stock Buybacks: Accelerate Returns

Since 1998, the 500 largest US companies have bought back about one-quarter of their shares in dollar value, yet the actual shares outstanding grew. This is because they hand out shares in lavish incentive packages to greedy executives.

According to Warren Buffet: “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds – cash plus sensible borrowing capacity – beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”

When you find a company that drives its shares outstanding lower over time and seems to have a knack for buying at good prices, you should take a deeper look.

Chapter 12: Keep Competitors Out

“A truly great business must have an enduring moat that protects excellent returns on invested capital.” – Warren Buffet

A “moat” is what protects a business from its competitors. It’s a durable competitive advantage.

According to Pat Dorsey in his The Little Book That Builds Wealth, Dorsey uses the following analogy why you should pay attention to moats. “It’s common sense to pay more for something that is more durable. From kitchen appliances to cars to houses, items that last longer are typically able to command higher prices. …The same concept applies in the stock market.”

Some examples of moats:

  • You have a strong brand, which inspires loyalty and ensures recurring customers (examples: Tiffany’s, Oreo and Coca-Cola).
  • It costs a lot to switch (examples: bank-accounts and software operating systems).
  • You enjoy network effects (examples: YouTube, Facebook, Instagram and TikTok).
  • You do something cheaper than everybody else (examples: Walmart and Interactive Brokers).
  • You are the absolute biggest in a market (or niche!)

Great management is not a moat by itself as Warren Buffet once pointed out: ”when management with the reputation for brilliance meets a company with a reputation for bad economics, it’s the reputation of the company that remains in tact”.

Moats, in essence, are a way for companies to fight mean reversion, which is like a strong current in markets that pulls everything toward average. If you earn outsized returns, mean reversion says over time your returns will fall toward the average (or mean) over time. If you earn low returns, mean reversion says over time your returns will likely rise to average.

Although moats are not always easy to identify, you should first focus on the company’s gross margin relative to its competition—the higher, the better. Afterward, you can begin investigating whether the reason for this relatively high gross margin is durable, i.e., does the company have a moat?

Chapter 13: Miscellaneous Mentation on 100-Baggers

The author uses this chapter to write about some investment wisdom which didn’t seem to fit anywhere else in this book – and in no particular order of importance.

Don’t chase returns by withdrawing funds after poor performance and reinvesting after good performance. Doing so will cost you a lot of money over time.

There are ways to beat the market over time. But none of these approaches always beats the market.

Focus on buying stocks which you are planning to hold for a couple of years. Don’t get bored!

Carson Block, founder of short seller Muddy Waters Research, warns about the following ways in which “the system” works against investors:

  • On Management: Incentives are often short-term. They encourage risky betting. Don’t fall for the charm of a charismatic CEO. Read conference-call transcripts (in stead of listening to them) and look for disappearing initiatives, changes in language and evaded questions between several quarters.
  • On Boards: When boards have to investigate something, it’s like asking them to admit their own incompetence. You can’t rely on them.
  • On Lawyers: They represent the interests of their clients – the people who pay them – not investors.
  • On Auditors: Again, they represent the interests of their clients – the people who pay them.
  • On Investment Banks: Don’t look to research put out by investment banks or brokerage houses as a source of advice on where you should invest. They are looking our for their own interest, not yours.
  • On Market-Research Firms: Companies hire these firms and often give them the research to get the report they want. Look for more objective resources of information, such as actual sales data and trends.
  • On China: “No fraudster from China has even been meaningfully punished for defrauding North American investors.”

Don’t take the market and yourself too seriously, and don’t attempt to predict short- or long-term shifts in the economy or the price levels of common stocks. Instead of forecasting, focus on the opportunities in front of you

According to Martin Sosnoff, who wrote Humble on Wall Street, “the price of a stock varies inversely with the thickness of its research file. The fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those that appreciate the most.” This wisdom is currently known as Sosnoff’s law.

Beware of fixed ideas. For example: people that always recommend buying gold or who are always expecting the market (or dollar) to crash. Instead, try to always keep an open mind.

Be suspicious of abstractions. They are predictions about how the world might look. For example: Peak Oil and The New Economy.

Warren Buffet about inflation protection: “For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets (In Goods We Trust). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.” Thus, Buffet advices to always invest in companies that earn a high return on its asset base.

“The difficulty lies not in the new ideas, but in escaping from the old one.” – John Maynard Keynes

The ideal business (also during an inflationary time) is one that can (a) raise prices easily and (b) doesn’t require investment in a lot of assets (in order to be able to raise those prices).

Chapter 14: In Case of the Next Great Depression

Marty Whitman, who managed the Third Avenue Value Fund, made the following reasonable comment as the whole 2007-2008 crisis unfolded: “General markets tend to come back strongly in periods subsequent to price crashes! That was the case in 1932, 1937, 1962, 1974-75, 1980-82, 1987 and 2001-2002. A comeback also seems likely after the unprecedented crash of 2007-2008.”

However, Whitman identifies the following three types of stocks unlikely to participate to any extent in any price comeback:

  1. Stocks that were grossly overpriced to begin with.
  2. Stocks that suffer from a “permanent impairment” (something has changed and the business is no longer capable off doing what it once was).
  3. Stocks that are subject to massive dilution during the crisis (when a bunch of new shares must be issued at depressed prices to cover losses or pay back debt).

Although you probably know John Maynard Keynes as an influential economist, he was also a great investor. Keynes’s investment philosophy is based on the following three pillars:

  1. Careful selection of a few investments (or a few types of investment) based on their cheapness in relation to their probable, actual and potential intrinsic value over a period of years ahead, and in relation to alternative investments;
  2. A steadfast holding of these investments in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it has become evident that their purchase was a mistake.
  3. A balanced investment position, that is, a portfolio exposed to a variety of risks in spite of individual holdings being large, and if possible, opposed risks.

Don’t be afraid to hold onto cash until you find those special 100-bagger opportunities.

With stock prices low (in times of financial crisis), the cash-rich investor has a chance to “steel” some things. Why invest in new oil wells when you can buy them on the stock market for less than half of what it would cost you to drill new ones? Why build factories when you can buy a competitor for 20 cents on the dollar?

Prioritize owning stocks in strong financial condition, with manageable debt levels, as these stocks tend to rebound the quickest after a financial crisis. Avoid using leverage (or debt) to prevent the risk of being completely wiped out.

2.5% inflation compounded over a period of 10 years results in a 28% cost-of-living increase!

Personal note: During financial crisis always look out for new opportunities. In these periods it could be a smart idea to sell a company at a significant loss if you can acquire a superior company under more favorable conditions.

Chapter 15: 100-Baggers Distilled: Essential Principles

You only have so much time and so many resources to devote to stock research. You want to focus on growth in sales and earnings (per share). Focus your efforts on the big game: the 100-baggers.

Time is the friend of a great business, so you can pay more form them.

“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expansive looking price, you will end up with a fine result.” – Charlie Munger.

The PEG ratio, or price/earnings to growth ratio, is one way to search for companies valued at fair prices. A PEG ratio value of 1 represents a perfect correlation between the company’s market value and its projected earnings growth. PEG ratios higher than 1.0 are generally considered unfavorable, suggesting a stock is overvalued. Conversely, PEG ratios lower than 1.0 are indicating a stock is undervalued. Example: if earnings grow 20%, then a P/E ratio of 20 is justified as it then has a PEG ratio of (20% / 20 =) 1. The higher the multiple you pay, the higher earnings growth needs to be.

No one creates a stock so you can make money. Every stock is available to you only because somebody wanted to sell it. However, investing with owner-operators can provide an advantage, as you become a partner in the company.

According to the author: “If you’ve done the job right and bought a stock only after careful study, then you should be a reluctant seller.” He ends with one of his favorite quotes, from Martin Whitman at Third Avenue Funds: “I’ve been in the business for over fifty years. I have had a lot of experience holding stocks for three years; doubled, and I sold it for somebody else, for whom it tripled in the next six months. You make more money sitting on your ass.”

Personal Note: Never sell a company as long as it has a ROC (or ROE) of +20% and is able to reinvest and earn that high return for years and years (unless valuation gets really stupid). Transfer these companies to a separate trading account to create my own “coffee-can portfolio”.

Reading the original book instead of a summary offers a comprehensive understanding, emotional connection, appreciation of the author’s writing style, direct support for the author, and the chance to discover hidden gems. Enhance your reading experience by purchasing the book through my affiliate link: Get the Book on Amazon.

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