Sunday, May 20, 2018

Book: 100 Baggers: Notes and References

These are the detailed notes from the book 100 Baggers written by Christopher Mayer. You can read the review by clicking here.

Chapter 1: Introducing 100 Baggers

You will learn the key characteristics of 100-baggers. There are only so many ways up the mountain, and we’ll map out these paths
Note: Objectives of the book. One, lear the key characteistics of 100 baggers. Two, explain some techniques by which an ordinary investor can identIfy and profit t from 100 baggers

you will learn why anybody can do

share with you a number of “crutches” or techniques that can help you get more out of your stocks and investing.

this book was called 100 to 1 in the Stock Market by Thomas Phelps.

“Every human problem is an investment opportunity if you can anticipate the solution,”

This was the main thrust of our conversation: the key is not only finding them, but keeping them.

Investors crave activity,

But investors need to distinguish between activity and results.

‘A lot of shavings don’t make a good workman.’”

Phelps advises 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.
Note: This is what Jim Slater recommended in he Zuu Principe

“There is a Wall Street saying that a situation is better than a statistic,”

Phelps is quick to add he is not advocating blindly holding onto stocks. “My advice to buy right and hold on is intended to counter unproductive activity,”

Sometimes stocks take a long time to get going.

“One of the basic rules of investing is never, if you can help it, take an investment action for a noninvestment reason,”

You should sell rarely, and only when it is clear you made an error. One can argue every sale is a confession of error,

The main idea is to know how such returns have happened and what investors need to do to get them.

“Just a slight change in a golfer’s grip and stance may improve his game, so a little more emphasis on buying for keeps, a little more determination not to be tempted to sell … may fatten your portfolio.

Chapter 2: Anybody can do this: True stories

Chapter 3: The coffee can portfolio

“The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”
Note: Success of CC portfolio depends on the stocks you choose to invest in

The idea is simple: you find the best stocks you can and let them sit for 10 years.

It works because it keeps your worst instincts from hurting you.

how the coffee-can portfolio is designed to protect you against yourself—the
Coffee can portfolio

nvestors have been conditioned to measure stock-price performance based on quarterly or annual earnings but not on business performance.
Note: Why investors do not hold on? Why dont investors follow buy and hold approach?

Book Idea: The Investor’s Dilemma, which I highly recommend

He wrote, “The average asset life of companies in the US is shortening.” And more and more firms are in shorter-asset-life industries. Mauboussin concluded, Shorter asset lives suggest shorter time horizons over which managers should invest, a reasonable reflection of the business world.

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.

Those who held on had to suffer through a peak-to-trough loss of 80%
Note:It is very important to stay the course despite some dizzy falls

So it takes patience, some savvy stock picking and—as with most things in life—some luck.

Book Idea: Hedgehogging

On the wisdom of crowds, Biggs found that the stock markets of the world showed “surprisingly good intuitions at the epic turning points.

Biggs made the case that the collective judgment of the market can be wiser than we allow.
Note: At inflection points in history market has given the right signals

how to preserve wealth when the Four Horsemen are on the loose.

move—stocks were still often the best way to preserve purchasing power over a period of years, even in devastated Germany.

But it is also because he understood the best shot you have at growing your wealth is to own stuff. You want to be an owner.

The essence of the coffee-can idea is really that it’s a way to protect you against yourself—from

If you are a bear and abstain from using a coffee can, you’re basically saying you’ll make a series of better short-term decisions over the next 10 years than you would if you just sat on your best ideas today.

the theory behind the coffee can says your series of shorter-term decisions is likely to be worse than one decision today.

It seems to me a better existence to instead know what you own and then really own it, as you would a rental property.

Chapter 4: Analysis of 100 Baggers

Article Idea: “An Analysis of 100-Baggers.” You

4 conclusions of Tony. One, the fastest rise in stock price occurs during period of rising earnings accompanied by expansion in PE multiple.
PE expansion accompanies profit growth
Some of the best opportunities are in turnaround stocks.

combination of rising earnings and a higher multiple on those earnings is really what drives explosive returns over the long-term.

This book refers to yhe Motilal Oswal study

five elements forming the acronym SQGLP,”

“In the ultimate analysis, it is the management alone which is the 100x alchemist,” they concluded. “And it is to those who have mastered the art of evaluating the alchemist that the stock market rewards with gold.”

Article Idea: 45-slide presentation called “10x Return Stocks in the Last 15 Years,” by Kevin Martelli at Martek Partners.

To make money in stocks you must have “the vision to see them, the courage to buy them and the patience to hold them.”

“100 more predictable multibagger stocks, which a rational and long-term-oriented investor had a ‘reasonable chance’ to identify, purchase and hold over the long term.” It’s a good study. Some conclusions:

There is no magic formula to find long-term multibaggers. A low entry price relative to the company’s long-term profit potential is critical. Small is beautiful:

68 percent of multibaggers in the selected sample were trading below a $300 million market cap at their low. (They were microcaps.) Great stocks often offer extensive periods during which to buy them. Patience is critical. I’d add that many

Article Idea: “Ben Graham and the Growth Investor.” Heiserman forwarded

Another trap is that earnings alone has many limitations.

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. 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

A 100-bagger is the product of time and growth.

The last five years will more than double your overall return
It is better to hold on. Due to power of compounding the more you hold on the more your returns. For example if a stock becoomes a hundred bagger in 25 years it will only become a 40 bagger by year 20.

Finding what will become a 100-bagger is as much about knowing what not to buy as it is about knowing what to buy.

Chapter 6: The key to 100 Baggers

It is the capital allocation skills of the management team,”
High ROE which is generated not from leverage coupled with good capital allocation skills of the management. In addition the topline should grow by at least 10% per year

Chapter 7: Owner operators: Skin in the game

their penchant for making deals when others are afraid.
Owner operators do not like to pay tax. So their pretax earnings will be low and PE will be high. Also owner operators like to make deals when market is down.

S&P 500 uses a float-adjusted market cap to determine the weight in the index—meaning, the S&P counts only what is not in the hands of insiders.
Owner operated companies are underrepresented in the indices

It’s precisely counter to what you would want to happen. If the person running the business were buying more stock, then you want the weight to go up, if anything. The S&P is doing precisely the opposite, which is ridiculous.”

Article Idea: ‘The Rich Get Richer and So Can You: Investing in a Billionaire’s Index.’

Chapter 8: The outsiders: The best CEOs

Book Idea: The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, by William Thorndike,

The main idea is that these CEOs were all great capital allocators, or great investors. Capital allocation equals investment. And CEOs have five basic options, says Thorndike: invest in existing operations, acquire other businesses, pay dividends, pay down debt or buy back stock.

They also have three ways to raise money: issue stock, issue debt or tap the cash flow of the business.

CEOs tool kit: 5ways to allocate capital and three ways to raise money. How they play within these options separate winners from losers.

Thorndike writes that the successful CEOs understand that::
1. Capital allocation is CEOs only job
2. Most important thing isto increase the value per share
3. Cashflow not earnings determine value
4. Decentralized organizations release entrepreneurial energy
5. Independent energy is required for Organizational success
6. Sometimes thed best strategy is to hold your own stock
7. Patience is a virtue with acquisitions

They “disdained dividends, made disciplined (and occasionally large) acquisitions, used leverage selectively, bought back lots of stock, minimized taxes, ran decentralized organizations and focused on cash flow over reported net income.”
Note: Author is talking about the outsiers and how they effectively used the toolkit

Chapter 9: Secrets of 18000 bagger

real wealth creation, “not flying-first-class wealth, but having-libraries-named-after-you kind of wealth”— comes from owning and operating and building businesses and having a long-term commitment.

Chapter 10: Kelly's heroes: Bet big

Kelly Formula: bet big on your best ideas.
This formula was discussed by Mohnish Pabrai in his book Dhandho Investor

Book Idea: William Poundstone’s Fortune’s Formula.

Article idea: “Size Matters.”

In stock market, you can’t know your odds or your edge with any certainty. You must guess.
Note: How to apply Kelly Formula in stock market?

Unsuccessful investors hold too many stocks in their portfolio

Chapter 11: Stock buybacks: Accelerate returns

Chapter 12: Keep competitors out

Article idea: “Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation” is a 70-page report on the issue.

Mauboussin suggests creating an industry map. This details all the players that touch an industry.

where the profit in an industry winds up.

stability is another factor in determining the durability of a moat.

Mauboussin’s research indicates you may be better served in industries less susceptible to sweeping changes in the competitive landscape.

You need to identify companys which can survive. Latest figures show one-year survival rates of about 75 percent and five-year survival rates of roughly 45 percent.

Moats, in essence, are a way for companies to fight mean reversion. Mean reversion reflects the competitive nature of markets. Mean reversion does not affect all companies equally. Gross profit margins are surprisingly resilient. High preforming companies that do not revert to mean has consistently high gross profit margins. high gross margins are the most important single factor of long run performance. if a company started with a high gross profit margin, it tended to keep it.

Berry thinks gross margin is a good indication of the price people are willing to pay relative to the input costs required to provide the good. if gross margins are sticky and persistent, then a good turnaround candidate would be one with a high gross profit margin and a low operating margin.

Winners tend to remain winners.

It is difficult to identify moats. Therefore you should look for signs in the P&L like high and sticky gross profit margin to identify companies with moats. Also winners continue to be winners. Finally look for companies with high GPM and low OPM. These are potential winners.

Chapter 13: Miscellaneous mentation on 100 Baggers

In James Thurber’s Let Your Mind Alone!, there is a chapter called “Miscellaneous Mentation” that speaks precisely to what this chapter is all about. He writes, In going back over the well-thumbed pages of my library of recent books on mental technique, I have come upon a number of provocative passages which I marked with a pencil but, for one reason or another, was unable to fit into any of my preceding chapters. I have decided to take up this group of miscellaneous matters here, treating the various passages in the order in which I come to them.

Search for 100 baggers is qualitative which means right brain activity.

The 100 bagger mindset is to ignore chatter and noice, ignore TV. Investing for 100 baggers means, you ignore the noice and temporary good news.The mindset include the following
1. do not chase returns. you should compare yourself to the S&P 500, or the broader market, at all. ust focus on trying to buy right and hold on.
2. Do not get bored. In the financial markets, people often wind up sabotaging their own portfolios out of sheer boredom. It is the bias for action. bit of wisdom from Pascal that “all men’s miseries derive from not being able to sit in a quiet room alone.”
3. Do not get snokered. Avoid scams. Block’s presentation was all about the ways in which the system works against investors. Let’s go through them.
a. On management: Do not fall for the charisma of the management. When meeting them do your homework. Meet the management. Do your work before meeting management. How to resist charms of management.
one, read transcripts of conference call rather than attending them,two, review reports of multiple quarters and look for consistency, three, look for questions avoided and initiatives set aside or changing language.
b. On boards: Board members view their role as a perk and not responsibility. You can’t rely on them.
c. Lawyers: Don't be fooled that the company has a fancy lawyer. Laeyers are paid by yhe company.
d. Auditors: Auditors look after their clients. Auditing is a profession that rewards failure. Auditors regularly fight disclosures. They also use jargons to hide mess
e. Investment Banks: Don't Read brokerage reports as a reco to buy. They are intererrsted in getting you to buy the shares.
f. Market research firms: Distrust market research. Look for objective data to make your decisions

Precautions to take:

1. best thing to do is invest with management teams that own a lot of stock.
2. partner up with people who have had success.
3. stay away from weird things. If you don’t understand how they make money—see Sino-Forest—run!
4. avoid the hot sectors of whatever market you’re in.

odds of you owning a stock that doesn’t suffer a negative earnings surprise is pretty small. The earning estimates are on the higher side and they are generally wrong. Reading together the chances are that you wil lose money after earnings come out.

Article Idea: Building a Profession: Benjamin Graham

Many people spend a great deal of time trying to guess where the economy or the stock market is going.

When someone tells me they can’t find anything worth buying in this market, they are just not looking hard enough.
There are about 3000 listed stocks. At any time atleast 1% tht is 30 stocks will provide a buying opportunity.

What I have learned from over a decade of writing newsletters

Book Idea: Sosnoff’s law. This comes from a book called Humble on Wall Street, published in 1975 and still one of the best books on the experience of investing, The law states that:

“the price of a stock varies inversely with the thickness of its research file. the best ideas are often the simplest. Beware of “fixed ideas.”

Book Idea: Ego and his own

Stirner contended that people do not have ideas. Rather, their ideas have them.
Note: This is a very good blog idea

These “fixed ideas” then rule over their thinking. Stirner wrote that a thought was your own only when you “have no misgiving about bringing it in danger of death at every moment.”

In markets, you see many people with fixed ideas.

Be suspicious of abstractions. Paul Goodman

People take easily, though, to big ideas: Be wry about fancy ideas Like new economy, oil peak,chinese domination...

“Investment,” author John Train once wrote, “is the craft of the specific.”

Investing is a people business.

knowing what the numbers don’t show is worth more than any statistic.
Note: The right brain thinking as per TAO JONES AVERAGES

To find a situation like this requires a lot of reading and networking.

Hidden stories exist. And there is a person, somewhere, who knows that story.

Investing abroad. Investing abroad is a way to expand the menu. when we invest abroad we often trade risks we see for risks we can’t see or are not aware of.

Blog Idea: Peter Lynch’s example from Mayan mythology.

monetary depreciation favors the asset light.

The irony for the big-picture crowd is though they tend to shun stocks, when they do get involved they favor the worst kinds.

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

Chapter 14: In case of the next great depression

“General markets tend to come back strongly in periods subsequent to price crashes!

Whitman identifies three types of stock unlikely to participate to any extent in any price comeback.

The first category includes stocks that were grossly overpriced to begin with.

The second type of stock unlikely to recover is one that suffers a “permanent impairment.”

The third and final category includes stocks “subject to massive dilution during the meltdown

the duty of a serious investor to accept the depreciation of his holdings with equanimity

Blog Idea: (Section 2350) Be quiet’” is our best motto,” he wrote, by which he meant to ignore
Note: This section will make a great blog post

investors need to take losses with “as much equanimity and patience” as possible.

Book idea: “Keynes the Stock Market Investor,” by David Chambers and Elroy Dimson.

Keynes philosophy 1. Value investing 2. Buy and hold 3. diversification

slumps are experiences to be lived through and survived with as much equanimity and patience as possible.

Book Idea: David Feldman: Ups and Downs of a Wall Street Trader during the Depth of the Great Depression of the 1930s.

in investing, you should never cry over spilt milk,” he writes. “Only the future is of importance.”

Chapter 15: 100 Baggers distilled: Essential principles

Book Idea: 100 to 1 in the Stock Market.

reinvestment as the single most critical ingredient in a successful investment idea, you need a business with a high return on capital with the ability to reinvest and earn that high return on capital for years and years. Same point made by Tom Gayner in his Google Talks

#1 You Have to Look for Them:“When looking for the biggest game, be not tempted to shoot at anything small.”

It is more important to think about earnings power. Focus not on earnings but on earnings power

spend more time on understanding what you own.

#3 Lower Multiples Preferred. Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs, as you’d expect.

#4 Economic Moats Are a Necessity

"When you buy a cow to milk, don’t plan to race her against your neighbor’s horse.”
If you are looking for growth, dont bother about dividends
If dividends are a drag, borrowed money is an accelerant.

#5 Smaller Companies Preferred

#6 Owner-Operators Preferred

Because then you become a partner.
Note: I have to identify the owners of shares in my portfolio

#7 You Need Time: Use the Coffee-Can Approach as a Crutch. find some way to leave your stocks alone.

#8 You Need a Really Good Filter
The importance of process. When you are looking for 100 baggers don't focus on the day to day fluctuations of the market.

#9 Luck Helps

Book Idea: Luck: The brilliant randomness of everyday events

#10 You Should Be a Reluctant Seller

Article Idea: “The Frugal Man Who Left an $8 Million Estate.”

“Never if you can help it take an investment action for a non-investment reason.”
The best investment advice ever

you should sell when you’ve made a mistake.

To me, investing in stocks is interesting only because you can make so much on a single stock. To truncate that upside because you are afraid to lose is like spending a lot of money on a car but never taking it out of the garage.

Book Idea: Invest like a deal maker
Book Idea: A zebra in lion country

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