Sunday, May 20, 2018

Book Review #36: 100 Baggers: Author: Christopher Mayer

Over 15 chapters,  '100 Baggers - Stocks that return 100 to 1 and how to find them' written by Christopher Mayer makes a fascinating reading. The book starts off by analyzing the 100 Baggers from the 70s to the early 2000s and try to find common lessons for the investors. The list of 100 Baggers is diverse in terms of age, industry and size. There are 50 year old companies, there are new ones, there are small, medium and large caps and these belong to diverse industries. 

To earn 100 bagger returns, you have to save yourself from yourself. Your bias to action when things are going nowhere, your itch to sell when the share price falls by whooping 40% in a day, your fear when the stock you own falls from high triple digits to single digits, as it happened in case of Amazon.

Buy the Kindle Edition of this book @Amazon at 135 rupees.

To get returns of the magnitude of 100 baggers, traditional mindset nor traditional investment style
will work. One need to develop an owner mindset. Learn to ignore the noise on TV and on news papers, stop following share prices like a hawk, be able to handle high volatility in prices including 80% fall in prices of the stocks you hold. 

One should be an owner and a holder. One must learn to buy and hold. For a very long time. 

Once you have the mindset, how to identify a potential 100 Bagger?

The book suggests some guidelines. The twin engines that create 100 baggers are increasing revenues and expanding multiples. Sustained growth in sales can come only when you have a durable competitive advantage (moat). While one has heard a lot about this, an average investor will find it difficult to analyse and identify moats like a professional, but not to worry. Moats tend to reflect in financial reports. Some signs that a company has moat include, high and sustained / increasing return on equity, especially in a situation of low leverage, high gross profit margins (this one is new), high and increasing PBT margins etc. A turnaround company with high GPM will have a better chances of quickly turning around.

A company with a small size has significant advantage over one with a large size. As was mentioned in the book Zulu Principle, 'elephants do not gallop'. If you find a small company with a low price multiple meeting other criteria, one should invest a lot of money on that company. That is a potential 100 bagger.

Surely there must be some things that one should be sceptical about while analysing a company. Well a savvy investor should be sceptical about almost anything. While evaluating management, one should try to read the analyst meet transcripts rather than listening to the management. Specifically one should look for evasion, unkept promises and abandoned initiatives etc. Similarly one should we wary of the board, lawyers, auditors, complex management reports, investment bankers....

Almost all of them have personal agenda and are paid by the management to be their voice.

When it comes to investing your money, scepticism is a virtue.

To net a 100 bagger, one should learn the art of being patient. 'Action bias' is one of the challenges which even a professional investor faces. If a stock do not move for a long time, there is a tendency to take some action (mostly sell) on that. One should develop equanimity when investing in market. One should have confidence on the long term trend of the market. 'Sitting tight' is a virtue in stock market. 

From an Indian Investor's perspective, Motilal Oswal's study on 100 Baggers finds a mention in this book. As we remember, MO says that for a company to be a potential 100 Bagger, it should meet the SQGLP criteria. This includes Size (smallcap, low base effect), Quality (Business, Management etc) Growth of earnings and valuation, Longivity (Durability of competitive advantage) and Price. 

The book ends with a discussion on the essential principles on netting a 100 bagger. Some of these like small size, low multiples etc have been discussed already in this review. Other suggestions include buying into owner operated companies (high promoter stake), invest for the long term, very long term, the importance of a good process and the final point, one should be a reluctant seller.

The book is teaming with life lessons. One of the best lessons that I have read so far in my life is 'Never make an investment decision for a non-investment reason'. On clarity of purpose, the author quotes Thomas Phelps, 'Don't buy a cow for milk and use it to race against neighbour's horse'. The context was that one should not buy a stock for dividends and expect exponential growth. 

On the importance of regular monitoring of one's portfolio, the book says that just as the golfer can get significant improvement in his game with a slight adjustment in their grip, an investor can achieve significant returns with regular, small tweaks in their portfolios and approach.

This is a very good book. While you do not get a lot of technical information from this book, as any successful investor will tell you, making money in stock market is a mind game and this book equips you with tools to win this game. I will give a rating of 4 / 5 for this book. 

Finally, the excitement of investing in stocks is the potential for humongous returns from owning just one stock. The key point is that you have to start buying stocks.

One has to own stuff. One has to be an owner. Only owners make money.

(Note: While the hard cover edition is expensive (8000 bucks), you can buy Kindle edition for just 135 rupees. It is worth)

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