In this video, I will present the five main takeaways from 100 baggers: Stocks that return one hundred to one and how to find them written by Christopher Mayer Before we jump into the takeaways a quick explanation of what a "bagger" is might be appropriate it's an expression from baseball where a base is also referred to as a "bag" and a ten bagger is two homeruns and double bottom line, a very successful play The term was coined by Peter Lynch, in his "One up on Wall Street". There he references to these 10 baggers, which are stocks that increase ten times in value And he also reveals his investing strategies on how to find them This is a book about hundred baggers, which are stocks that increase 100 times in value $10,000 invested in a hundred bagger turns into one a million dollars A staggering increase Managing to pick just one hundred bagger in one's lifetime will probably secure your personal finances, and cap potentially finance a retirement For this book Christopher Mayer studied 100 baggers during the period in 1962 to 2014 in total 365 companies and their characteristics were used to draw the conclusions in this book Let's take a look at Christopher Mayer's suggestions on how to invest in stocks that return 100 to one Takeaway number one: buy puppies First things first You must look for companies that are able, I mean basically from a mathematical standpoint, to become 100 baggers Large companies are not necessarily bad investments but if you are looking for hundred baggers these should not be your priority. If you look at Microsoft or Apple for instance they already have a market cap of around a trillion dollars, which means that you must be quite creative to imagine that either one of them will grow a hundred times from here and would one of them achieve that they would be roughly five times larger than the US economy is today Instead concentrate your research on smaller companies, the puppies, that can grow say 10 to 20 times and still be regarded as small The good thing is that you don't have to find say Apple while the founders are still working from their garage, or Starbucks with only one store selling coffee beans Even many years later there were still opportunities to hop on the wagon and enjoy hefty returns in these companies There are approximately 4,000 domestic companies listed on the U.S. Stock exchanges today among which, approximately 30% are small puppies, so-called micro caps. This is a vast area to explore and, somewhere in this pile is the next Apple or Microsoft With that said, you should perhaps not look at the smallest companies either, with unproven products and no sales. In the study that gave rise to this book, the 365 companies that later experienced increases over 10,000 percent had median sales of 175 million dollars Christopher Mayer suggests that you should draw the "puppy-line" somewhere around a billion dollars, but avoid the puppies who aren't even born yet Takeaway number 2: The twin engines Something that the hundred baggers of the last 50 years have had in common, is growth - in all its dimensions Christopher Mayer suggests that you should invest in companies that can enjoy both a strong growth in sales, but in valuation multiples as well Growing sales combined with, for example, growing the price to earnings multiple is something he refers to as the "twin engines" Let's start by having a look at the first engine: sales growth The sales growth is essential in order to grow a company's valuation hundredfold If the growing sales also finds its way down to the bottom line, and increases the net earnings, that is extra beneficial as it will most likely increase the valuation multiples quicker That is not a necessity though Just take Amazon as an example. It has had a tremendous sales growth, but the actual earnings ... Well, they have lagged behind What you should be looking for are companies with a disruptive product service or business model where the company is reinvesting the earnings in the business to become even more competitive in the long term. So first engine: sales growth The second engine is the "multiple growth" or "multiple expansion" Given that the multiples of the company aren't too expensive from the beginning, high growth is usually rewarded with higher valuation multiples This is the twin engines at work. Let's consider the arithmetic. As an example, we'll use a company that currently has a price to earnings multiple of 15 and sales of about 200 million dollars If it can increase its sales by a hundred percent, the stock price will increase by a hundred percent as well, given that the multiples and the profit margin remains the same Two hundred percent and the price will increase by two hundred percent But what if we split that? So that the company grows a hundred percent in sales and a hundred percent in valuation? When the two endings are working together they strengthen each other and the end result is not just a 200% increase but a 300% increase in the stock On the opposite side of the spectrum are stocks with very high valuations. For those, one of the engines will work against you and the company will need to achieve very high growth rates in sales to compensate for it So, search for companies that grow at a high pace But try not to pay too much for them so that you can enjoy the twin engines Takeaway number three: Owner-operators According to Christopher Mayer: Ultimately, it's the management alone which is the 100x alchemist And it is to those who have mastered the art of evaluating the alchemist that the stock market rewards with gold This means that when it comes to investing, you should make sure that the operators of the company, that is their board of directors, the CEO and so forth, have the right incentives for making the best decisions from the perspective of shareholders If these operators own large parts of the company, they'll loose money if the company performs poorly and gain money if the company performs well This type of situation is what you must look for as an investor Let's take Jeff Bezos as an example He started Amazon when he was 30. He's now 55, continues to run Amazon and still owns about 12% of the company You can be sure that he won't make some short-term decisions in order to reach some "quarterly sales quota" He will, to the best of his abilities, make long-term decisions that, by extension, also will be the best for long-term shareholders. If the plane that is Amazon crashes, the pilot that is Jeff Bezos will crash with it Just as it ought to be. For more on how to find great managers, please see my summary of The essays of Warren Buffett Takeaway number four: The coffee can portfolio The coffee can portfolio is a method dating back to when people hid their most valuable possessions in a coffee can and put it under the mattress The method on how to invest in a hundred baggers is basically the same - pick the best stocks you can find and then put them in the coffee can! The average hundred bagger required 26 years of holding before reaching its 100x status Did I hear someone say passive income? Christopher Mayer makes the similarity between an investor and a fish A fish only eats a bait that moves and if the bait doesn't move, well, the fish doesn't care about it Same thing often goes with investors Stocks that don't move are often sold due to lack of action Even though the fundamentals of the company moves steadily in the right direction! Also, stocks that underperform for a short period of time are often sold, again, even if the underlying business moves in the right direction! Take Monster Beverages as an example On quite a few occasions, the stock has lost 20% or more in value within a month and on one occasion as much as 40% There were many situations in which it was probably tempting to sell the stock But gee, would that have been a mistake as it became a hundred bagger in just 10 years! The best investors often say that the greatest enemy to superior returns are ourselves and our human traits Greed fear, etc However, different time periods of an investments lifetime are affected differently by these damaging traits You are often most rational when you don't own the stock The coffee can portfolio uses this as an advantage After your due diligence is done and you have made a purchase, just put the stock in the coffee can and leave it be This is a way to protect you from yourself You can view this as a boredom arbitrage As Warren Buffet puts it: "The stock market is a device for transferring money from the impatient to the patient" So buy right then sit tight. This is how to make money in hundred baggars Takeaway number five: Ignore the macro analyst When you have invested in a potential 100-bagger, or are looking for new opportunities, you should ignore whatever the FED is doing, who's the president at the moment, and what's currently going on in China Put blindfolders on and focus your strategy on analyzing and finding hundred baggars Because, these jewels they continue their journeys, even during recessions The management of these companies seldom care about the current interest rates or Trump's latest tweet They only care about the great products and services that they sell, and so should you As quarterly earnings are presented also during times of recession, companies that make headway and can show high demand of their product are rewarded by the stock market, even though it might be the autumn of the year 2008 When you have spent time and effort on analyzing these stocks with a great future potential you don't want to miss out of the gains because a macro analyst might suggest so Let's take a quick example from the financial crisis. The retail company Dollar Tree, which just so happens to be a hundred bagger, grew its revenues from 3.9 billion dollars in 2007 to 4.2 billion dollars in 2008. That's a seven percent increase even in a recession The stock was rewarded by increasing from about 7.5 dollars per share to 14 dollars per share during that time - almost a 100 percent increase! While the S&P 500 during the same period lost about 40 percent of its value This merely works as an example of why it may be stupid to care about the macro hassle when you have successfully found a company that should be put in your coffee can portfolio Timing the market is hard Finding hundred baggers is no easy task either Don't try to do the combination. So: blindfolders on. Ignore president Trump and Xi Jinping, and focus on the task at hand: finding those jewels That's it on how to invest in stocks that return 100 to 1 Let's have a recap, before you enter the stock market jungle for your hunt Focus on companies that still have a long road to travel but make sure that they are currently on the right path Look for companies that can continue their growth for years to come and where there's still room for higher valuation of multiples: the twin engines Only board the plane if the operators are on board too Avoid emotional errors by putting your stocks in the coffee can Turn off the news, stop checking the total value of your portfolio every day, smash that like button and focus on finding the future hundred baggers, no matter the market sentiment Big thanks to my friend Richard Dykes for helping me in making this video. Bye for now!
