This past month, I listened to 3 audiobooks, and I found 2 of them to be very informative: “The Book on Rental Property Investing” by Brandon Turner and “100 Baggers: Stocks That Return 100-To-1 And How To Find Them” by Christopher Mayer. The Book of the Month for May 2019 is 100 Baggers because I liked the fact that the author combined both value and growth investing approaches to find the right stock. Furthermore, Mohnish Pabrai, a famous value investor, has this book in his bookshelf. So, in this week’s blog post, I will talk about the key takeaways from 100 Baggers.
Before I start talking about takeaways, let me provide you guys with a list of the top 10 small cap companies (below) that grew big and had the same traits that I will discuss in my post later. Please notice how diverse all these companies are. In the table below, the first column has the name of the company, second column has the date, third column has the total return the company has generated since it’s beginning, and the last column is how long it took for the company to achieve the “100 Bagger” title.
Here are few of the “newer” companies that achieved the “100 Bagger” status in the past 3 decades:
Now, Key Takeaways from the 100 Baggers:
- Look For 100 Baggers – The idea here is to invest in low risk, high reward companies. Companies that can generate a 100x return, with little to no downside risk. The 100 baggers are NOT going to be found in any indexes since index managers usually pick companies with lots of liquidity/float. Historically, majority of 100 bagger companies have been CEO/owner/founder owned; index managers ignore these companies because CEOs have majority ownership. However, this is an advantage for you. By having CEOs who have skin in the game (ownership), you are minimizing your risk. You know that the CEO is going to take the best decision for the company since his/her majority ownership is at risk as well. The subsequent bullet points will help you narrow down your search to find the stock that can give you a 100-to-1 return.
- Growth, Growth, and More Growth – Find companies that have growth in Sales and in Earnings Per Share (EPS), and have lots of room to expand.
- Lower Multiple Is Preferred – Companies that have low Price to Earnings (PE) ratio and low Price/Earnings-to-Growth (PEG) ratio are preferred. A PEG ratio below 1 indicates an undervalued stock, and a PEG ratio above 1 implies that stock is expensive. Your end goal is to use the PE and PEG ratios to find stocks with lots of growth at a low multiple. A lower multiple is important if you are trying to limit your downside risk.
- Small Company Is Preferred – Look for companies that have market capitalization of about $170 million. The idea is that you can start with an acorn (small), and end up with an oak tree (big). In other words, the 100x growth is more likely to come from a small cap company, which has the potential of massive growth, than that of a large cap company, which has already grown and can only generate moderate growth going forward.
- No Dividend – It is better when the small company does not pay dividend. By not paying dividend, the company could re-invest that capital back into the business, and accelerate its growth.
- High Return on Capital – This point ties in with the above bullet point. When a company does not pay dividend, you want to see that the management has the ability to reinvest and produce a high return on capital. That high return should be reinvested to generate an even higher return, and the compounding cycle goes on. Although new discoveries and inventions could get you a 100 bagger investment, they are hard to predict. So, investing in companies that generate a high return on capital is more realistic. Note: While debt financing can accelerate growth, ensure that the company’s debt is not excessive.
- Time – Plan on holding your stock for a while (5-20 years). The author talks about the Coffee Can approach, where you more or less buy the stock and forget about it. You ignore the noise in the market, and just hold onto your stock.
- Reluctant Seller – When should you sell? Almost Never! But, if you made a mistake (i.e. the stock investment is less favorable than originally thought) or if the stock does not meet your investment criteria (i.e. switch into something better), then you can sell. It is important to note that the reason you sell should have nothing to do with stock price. In other words, never sell for a non investment reason. As Thomas Phelps said, “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.“
Towards the end of this book, the author mentioned a quote from Charlie Munger. The author claims that this quote is the cornerstone of the 100 bagger philosophy; Charlie Munger says, “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 expensive looking price, you’ll end up with a fine result.” The graph below will help you understand what Charlie Munger is trying to explain.
Hope you learned a little and found this blog post helpful. We talked about key takeaways from the book 100 Baggers. It was a unique approach of combining both value and growth investing, while at the same time minimizing your risk. Buying companies at a fair price that generate high return on capital is the core concept of this book. If you are interested in reading this book, I have hyperlinked a pdf copy here. As always, you can sign up for our mailing list here. Like us on our Facebook page here. Thank you!
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