100 TO 1 IN THE STOCK MARKET (BY THOMAS PHELPS)

for those of us that do not possess massive wealth generating talents such as writing extremely relatable music leading and inspiring thousands of people in an organization or being able to take hundreds of punches to your head investing is probably the greatest road to riches and if there's one area within investing where the mathematics are truly mouth-watering it is when you are looking for stocks that can return 100 to 1. ten thousand dollars invested in a single one hundred to one stock will turn you into a millionaire the Home Depot would have given you millionaire status since 1991. Microsoft since 1995 Amazon since 2002 Apple since 2005 and companies like Nvidia and Celsius have managed to do it even quicker now maybe you're thinking sure if I had some bacon I'd have some bacon and eggs if I had some eggs many of us do not have ten thousand dollars laying around and we would certainly not be willing to invest them in a single company if we did but the mathematics are impressive with a thousand or even a few hundred dollars too just consider that if you invest in 100 stocks and just one of them makes 100x all the other 99 can go to zero and you'd still break even it is difficult to find a 100 to 1 stock but so is picking 99 companies out of 100 that all go to zero in fact I know some hedge funds that would pay your weight in gold in case you can accomplish that the Home Depot Microsoft Amazon Apple Nvidia and Celsius are success stories of the past though Peter minuit bought the whole of Manhattan for just 24 dollars worth of trinkets back in the 1600s but of course you and I have to operate in today's markets so let's dive in and try to understand how we can catch the next 100 to 1 stock this is a top 5 takeaway summary of 100 to 1 in the stock market written by Thomas Phelps and this is the Swedish investor bringing you the best tips and tools for reaching Financial Freedom through stock market investing takeaway number one four situations when Thomas Phelps researched what typically characterize a company that goes up 100 fold he concluded that there seemed to be four different situations seem to is important here otherwise we would be like Arnold when he told Betty that have you ever noticed that sugar is the only word in the English language where s u is pronounced she answered are you sure the four situations are one when stocks advance from the most extreme bear markets in history such as the Great Depression two when a company finds natural resources in a great quantity three when a company is leveraged to the teeth but manages to survive anyways 4. when a company is earning substantially more on its capital than a normal business and has strong growth prospects let's stop and think about these for a second number one doesn't seem like something that we can reliably look for I don't want to be the Doomsday Prophet who is sitting on 100 cash hoping that the world will break just so that he can invest his money in the stock market no neither would I want to gamble on number two betting that a company will go from nothing to finding an awesome amount of gold iron oil Rare Earth minerals or whatever is a little bit like playing the lottery Charlie Munger likes to say a mine is a hole in the ground owned by a liar the third category may have some Merit to it but it is very tough to navigate oftentimes over leveraged companies end up in bankruptcy and their shareholders are completely wiped out in favor of the debt holders however if you can find a stock where the market cap of the shares is say one-tenth of the total Enterprise Value you'll have some nice returns if the total Enterprise Value would for instance double lots and lots of diversification is recommended if you want to try this at home it is the fourth situation that we will focus on in this video all of the companies mentioned in the beginning belong here they earned a high return on Capital and were able to deploy more and more Capital at similar rates over a very long time when we buy such companies we have arithmetic and for the time on our side but we need to answer two important questions takeaway number two seriously important questions the father of value investing Benjamin Graham taught us that a share is a port ownership of a business over time the price of a share will follow the success of the company that it represents and of course business success as we know it today is producing as much earnings as possible for shareholders the 100 to 1 companies typically increase their earnings by something like 25 to 100 times over the course of a long period for seeing if a company can grow this much is no simple task but there are two questions that if we can answer them in the affirmative will tilt the odds in our favor firstly does the company have a durable mode against competition and secondly does it have great prospects for sales growth the world of business is cut throat and there's nothing that can ruin a good company quite like an even stronger competitor for a business to grow its earnings 25 to 100 times it must be able to fend off competitors for a long period of time and for that it needs what Warren Buffett likes to call a moat something that makes it so that other people and businesses can't easily replicate what they do and therefore steal their market share or ruin their High return on Capital I made a whole video about this before but here are a few examples of why a company possesses a moat according to Warren Buffett it can be because it's the low-cost producer in some area it can be because it it has a natural franchise because the surface capabilities it could it could be because of its position in the consumer's mind it can be because of a technological advantage well the second question no company can grow earnings Forever Without eventually selling more there's only so much that can be done with the profit margin even Pizza royalty Corp hasn't been able to breach 100 yet sales growth can come from a variety of different sources perhaps the industry itself is growing and the company can ride that wave perhaps the company can steal market share from competitors or perhaps there are geographies that haven't been explored yet a 100 to 1 stock absolutely require some such opportunity for expansion takeaway number three the power of PE usually there are two reasons why a stock increasing price we've already mentioned the first one which is growing earnings the second one is simply the valuation of those earnings think about the area of this rectangle as the price of a company on one side we have earnings on the other side we have the valuation of those earnings oftentimes expressed as PE or priced earnings the area or the price of the stock can double if we double the earnings but it could also double if we double the p e here's the point if both earnings and the valuation can increase simultaneously we're getting a quadratic result which is way more powerful than just a linear increase on either side most 100 to 1 stocks increase both earnings and their valuations PE is sort of like a hope thermometer some stocks score very high on the Hope scale While others fall very short while no doctor worth his salt would prescribe you anything based on a temperature Reading Alone he'd be equally disqualified if he doesn't at least check it if we want to find companies that can increase their PE valuation we must be aware of stocks that have too much hope already baked into their price if you've been investing for a while you've probably noticed that a company can deliver a five percent growth and the stock is up 10 while another company delivers a 20 growth and the stock is down 10 percent the Marcus reactions to changes in earnings resemble how the two boys able and Babel reacted to their Christmas gifts Babel was a happy boy when he received an RC car because he had expected nothing Abel was in tears when he received his RC car because he had expected a Ferrari when you buy a company that is priced higher than the market the s p sits at around pe24 right now know that you are buying into something that must grow better than the rest of the market for you to make a nice return on your money take Nvidia as an example as of this writing it has a PE of 175 which is more than seven times the s p 500. this means that a little bit simplified if Nvidia is to outperform the rest of the market it must increase its earnings more than seven times relative to it and then some such reasoning obviously shows a lot of confidence in nvidia's future the opposite holds true when you buy a company below the average not only must it grow slower than the average but it must also have lower prospects than the average in the unknown future otherwise you're going to over perform the soup is never even as hot as it is cooked if a stock is priced to already reflect a worst case scenario there's simply no downside risk left price price takeaway number four the fallacies of PE all earnings are not created equal though price is comparable one to one just as long as you use the same currency but earnings can vastly differ in their quality you don't want to be like the college graduate who was looking for a job on Wall Street with a resume that read five years of study two internships four years of beating the market total 11. hire me for example company A and B are both selling at PE 20. by looking into a crystal ball we know that both of them will double their earnings in the next 10 years however company a can distribute all of its earnings in dividends every year it doesn't require any Capital to grow its business while Company B must plow back all of its capital to accomplish the same thing which one is more valuable company a is more valuable because you can compound your investment by purchasing more stocks with that yearly dividend another example company C and D are both selling at PE 10. both can distribute all their earnings in dividends company C is spending quite a lot of money on R D each year while company D isn't which one is more valuable everything else equal it will be company C because at any point in the future it can cut its r d to make higher earnings or it might strike gold without research and get higher earnings from that Nvidia actually gets some retribution here it is spending almost twice as much as it is earning in r d remove this and poof nvidia's PE ratio might look more attractive Capital requirements in r d are not the only things that can make it difficult to compare the earnings of two companies in an apples to apple style a few more situations to watch out for are when one company is a good citizen and the other isn't when one treats his employees well and the other doesn't when one is cyclical and the other isn't takeaway number five why I have no 100 to 1 stocks one reason why you may not have a 101 stock yet is that well maybe you just didn't look for one in a sense we like the hungry fisherman who is equipped for herring in a sea filled with large salmon if we are satisfied with the Herring we're not going to get any salmon simple as that why do most people look for quick wins instead of 100 to 1 stocks a lot of us are probably thinking that since it oftentimes is difficult to forecast just three months ahead say to the next quarterly report it must be outright impossible to see 5 or 10 years ahead right that is not always true sometimes the long run is easier to predict than the short run just like it may be easier to State who will win the game rather than who will score the first goal another reason why it is hard to catch a 100 to 1 stock or rather to keep it is that we oftentimes confuse activity and results to get 100x in a stock we must buy right and sit tight and that is easier said than done look at this graph of Microsoft getting 100x in the company has been possible but one would have to sit still during the burst of the.com bubble for example there are so many incentives out there that work against us in this regard too for example your broker sure wants you to trade more that is good for their business is one of your Holdings down 10 percent well cut your losses short another one is up 10 and you're sitting here watching a YouTube video go go go no one ever went broke by taking a profit we should all remember the dog in Aesop's fable he lost the piece of meat he had in his mouth already by going for a seemingly even larger piece of meat reflected in the water so the situation that we want to focus on is a company with abnormal growth prospects for this both emote and possibility of sales growth is absolutely required it is also very helpful if the stock can receive a higher p e multiple than it already has however be careful with comparing the PE of different companies in an apples to apple style low Capital requirements High r d non-cyclical businesses should have higher valuations in order to catch a 100 to 1 opportunity first you must actually look for one and second you must be willing to sit tight in a world that is getting more and more short-sighted if you just can't get enough of growth stocks you should check out this video about the book called investing for growth written by Terry Smith tears guys

Channel: The Swedish Investor

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Length: 15min 39sec (939 seconds)

Published: Sun Jun 04 2023