100 Baggers is a book by Christopher Mayer on those companies that have returned more than 100 times the original investment cost to shareholders. Having got some 10-baggers in my portfolio, and with the summer lull in business and the markets, I was interested in reading how to spot the ones that could generate an even bigger return.
The author credits a book by Thomas Phelps called “100 to 1 in the Stock Market” first published in 1972 as the inspiration for his own title and quotes extensively from it. Mr Phelps died in 1992 and his book was out of print for a long time but is now available as a reprint at some considerable cost. It’s also rather archaic in references to companies. Mr Mayer’s volume is therefore a useful update on the subject and also covers many areas of investment practice from his own experience.
One interesting quote from Phelp’s book he supplies is this: “There is a Wall Street saying that a situation is better than a statistic” and also says that “Relying only on published growth trends, profit margins and price-earnings ratios is not as important as understanding how a company could create value in the years ahead”. That accords very much with my thinking as espoused in my own recent book.
Christopher Mayer is obviously a widely read investor as he includes numerous pithy and apposite quotations from other authors. But this tends to make his book rather episodic and unstructured in nature. It’s full of parables and apocryphal or true stories to reinforce the points he is making.
What are some of the key points he makes? Firstly to have a 100-bagger means you need to a) invest in companies at a reasonable price; b) start with a relatively small company; c) have them grow at 20% or more per year; and d) hold them for a long time. Diving in and out of companies, or reacting to overall trends in the economy or the markets should be avoided, i.e. you need to “buy and hold”.
Who are some of the 100-baggers in the US market on which the author concentrates as at 2014 when this book was published? Amazon, Microsoft, Electronic Arts, Amgen, Nike, Union Pacific, Pepsi, Equifax, Walgreens Boots, Hershey, Intel, State Street, Southwest Airlines, Wal-Mart and Sunoco are just a few of the 365 and many of them you will not have heard of before. The key point is that they come from a wide variety of industries and sectors but the book does cover what are the defining characteristics of these companies. That includes high and consistent growth in revenue and high return on invested capital.
Longevity is important. Many of the 100-baggers in 2014 took more than 30 years to get there, although some such as EMC and Charles Schwab took less than 10. But the author tends to skip over the problem that even if you pick a company with the right profile in its early days, the chances are that you will be taken out by a takeover bid, by changes to the market for its products/services, by changes in technology or other vicissitudes. Companies have shorter and shorter lives in the modern era so the chance of a company reaching the age of 30 as a listed vehicle is quite low. It may be mostly chance that enables them to reach 100-bagger status. But that does not undermine the basic thesis that it is best to aim for those companies that have the potential to do so.
There is much to be learned from this book. But it does conclude with the statement that “there is no magic formula” so bear that in mind when reading it.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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