Chris Mayer on 100-Baggers

all right thank you very much for that intro and it's good to good to be here it's a tough tough act to follow a lot of great speakers this morning so I'm going to talk a little about hundred baggers and what I've learned doing the research on 100 baggers of the last 50 years or so and then at the end I'll have an idea to talk about I'll bring up Thomson Clark who's the lead analyst helping with me helping me in the family office and we'll go through an idea cuz you don't care about what I've learned you want names right so first let me talk a little bit how this got started so there's an investor you guys may know Chuck okra is an excellent investor and in 2011 he gave a speech called the investment investors Odyssey you can google it and read it I'd highly recommend it he talks a little about his investing approach and he's a he's actually had 200 baggers to his credit he's owned Berkshire for a long time and the other one was American Tower and in that speech he talks about a book called hundred-to-one in the stock market written by a guy named Thomas Phelps and this book came out in 1972 and what Phelps did Phelps was a well he was a lot of different things he was a money manager of no particular distinction as far as I know he was uh he worked at the Wall Street Journal for a while I he worked at Scudder Steve's in Clark so he had a varied career he wrote this book which was a look at all the stocks that had gone up a hundred to one from 1932 up until when he published a book and the idea is just to see if he could find some similarities and use them in investing today so his book is it's very well written it's very folksy very quotable and so I I read that book and I fell in love with it right away and I started to quote it and talk about it and and finally a reader asked me he said you know you should really update it so I thought well that's a that's a good idea so that's where my book came in was really an updated Phelps's study I looked at all the stocks that had returned at least 100 to 1 from 62 to 2014 and that's as far back as I could get data was I used Compustat data and I screened out some of the tiniest names so you know like the 12 cent junior mining stock that goes up you know three bucks and the idea is really just to find if there were any similarities or qualities that a lot of these stocks had that we could look for investing today so I got the three hundred sixty five different names so just to go a little bit through some of the outlines of what this what they look like just in very broad terms this gives you an idea of sort of how long it took so you know most most of them fell on that column there took between sixteen and thirty years and it's really just a math problem at this point so it shows you the number of you what rate you have to compound to get to 100 baggers and I'm going to get to 100 X and how many years it takes you to do it so if you compounded 25 percent a year it takes 21 years to get there so it sort of gives you the outline already the hurdle that you have to get over it's compounding a high rate for a very very long time so the main point of this chart shows you the top performers in the study and the main think takeaway here is just to note that there really no industries that dominated the list there's all kinds of businesses on here so you have you know an airline actually in Ian's books out west Airlines is one of the very good case study if a retail you have you know a railroad way up there which is surprising and but the railroads are interesting case studies too because they own so many different assets and they wound up spinning off things and so they became tremendous creators of wealth Kansas Lee southern actually owned Janis which is which helped them help that returned quite a bit and then normally it takes a long time but here's some of the fastest to 100x is just again kind of an interesting list because it again includes a number of different businesses and NVR is a home builder which you wouldn't normally think of a business of the business you can make one hundred to one valiant is on here and a funny story about that is that in the book I pull out a number of these and do sort of little case studies on them and monster beverages one Pepsi is one Gillette Amazon and I thought it might be good to do Valiant because it was kind of a well-known name this is when it was still you know climbing hot sweaty $200 and Thompson is one of the excellent one the analyst was helping me work on these case studies and I remember his call May 2015 he called me says you know I can't figure this out I don't know you know I don't know how they make money I said well we'll just skip it let's pick something else you know if I was really paying attention about what I mean you can't wait mean you can't figure out what do you mean it would have been a great short idea because it subsequently collapsed and so a good thing I didn't put that one in the book so I'm just going to go over some of the kind of kind of take out some of the distill some of the main lessons and the first one is kind of obvious and then I'll go through some others so the first one is we are at the micro cap conference so let's throw the micro cap space a bone you have to start small or helps to start small and Ian had a great slide where he showed a number of great companies that you know today normos and we know are great companies that started off very small once maybe surprising thing to point out is that at least in the 365 stocks that I pulled together for this study and they were small but they weren't tiny it's kind of like the median sales figure is about a hundred and seventy million dollars that's pretty substantial business the second lesson here is or one of the most important lessons if you got to hold on to them for a long time and that may seem obvious but I have a story to tell you that I just want to pull us some notes I want to get some of the details right although it doesn't really matter you guys wouldn't know if I'm telling truth or not but as a friend of mine as a hedge fund manager had bought this painting and this illustrates so many interesting things about investing for the long term but in 1999 he bought this painting was a it's a painting by Ed Ruscha called sunset to Pico and he paid 150 150 thousand dollars for it his wife thought he was crazy it was by far the most he ever paid for art but whose hedge fund manager decently successful wasn't like broke it broke the bank or anything so he takes this picture and he hangs it up in his a you know whatever his lot in his living room and he likes the painting he leaves it there and he hears over time that no paintings by worth more than he paid but he doesn't think anything of it and so finally last year he decides to he's going to sell it because he's getting older and he decides he wants to pay off the mortgage on his house and he's just thinking to do some things so it goes to Sotheby's to get it appraised and they tell him they think they can sell it for a million bucks so you know remember he paid 150 thousand dollars so he goes and puts it up for auction and the way the auction works is you put up a reserve so that he put up a number that you're not going to stop for less than he and that number was eight hundred fifty thousand so the bidding starts at five hundred thousand he tells me the story like he's all excited he gets there was his wife and daughter and all dressed up and it's like going to Derby day or something so they go there and the bidding starts very quickly against eight hundred fifty thousand so you know breathe a sigh relief he finally he sold the painting and the bidding keeps going it hits a million dollars and he takes a picture of it and there's you know wow I sold a painting for a million bucks bidding keeps going up to a million five and then the bidding starts to flag a little and she's getting ready to the gavel and someone comes in two million six and it keeps going million seven million eight hits two million to one to two when she finally hits the gavel it's 2.3 million dollars so he's telling me the story the first thing I said was you know if if that was a stock you've never never would have held on to it that long so when you think about why why is that you know what helped him hold this painting all this time to make that much money at the end and I think one big reason was that he didn't have somebody coming in every day offering him a price what they pay you know just a man like when we own stocks we see stock price every day often times multiple times a day we're checking our stocks checking our stock would be very very hard to hold on to that painting if you know you had someone come in every day he'll give you $500,000 for come on and then two months later so now I'm gonna give you 250 you think how it works on your psychology all that stuff so one of the big lessons of that I think that you can't price your performance so much because it just wears on you and in the phelps book the original phelps book he has a great one of my favorite tables in the book is a table of Pfizer's financial results and i think it's like sales and then income but one of them is definitely return on equity and it's for like a 25-year period of time and he just says looking at this column of numbers is there any point where you have sold this business and so it starts from whatever you know 19 let's say 40 whatever and you see it's 20% are ohi's at very high ro e's every year yeah so i'm a little lower some little higher sometimes sales are flat maybe there's a year it went down but just looking purely those numbers he would never sold that business but yet and you would have had 100 times your money if you had held it but of course lots and lots of people sold that business and why because they saw the price every day and they read the newspapers and you see interest rates going up down wars and depressions and cats and dogs living together and all kinds of crazy stuff and you know you would never never have held on to it but if you just followed the business it makes it easier so and the book i talk about this idea none of us is going to do this but I just like the metaphor of it and maybe maybe it will help you this is idea called the coffee can approach my she had a reader of the book tell me that he has a coffee can now on his bookshelf to remind him of this idea but that was kind of cool but this is an old-fashioned coffee can there was a guy named Robert Kirby who was a very famous money manager for Capital Group he wrote a number of famous essays one of them was called the coffee cannon it was in the journal of portfolio management in 1984 so the idea goes that you know in the Old West when you had valuables or something you put in an old coffee can and bury it somewhere and that's how you stored variable their valuables whether it's true and I don't know but it's interesting story and so he got this idea because he managed this one of his clients he manages woman's account and over time you know he made buys and sells and then years and years go by and her husband dies and and he she takes her husband's accounts and gives them to Kirby to so he gets the account and he's amused to look at it and say it has all the stuff that he's been buying for her you know he's sort of his piggybacking on his ideas with one difference which is that he never sold anything and so you know he's looking at the list and he's like my god you know some there's some of these stocks that are just huge positions and there's one stuff that's worth more than his entire account that he's managing for her now and so he he writes about you know the power of the of the coffee can and how again it's this this idea that you don't want to price your performance every day all the time and how much that really affect your investment results so another thing I'd like to say or like to add here is that lower multiples preferred it's tempting when you look at these hundred baggers to think that it doesn't matter what price you pay you know if something's going to go up 100 fold but it does really matter and a lot of these stocks started at fairly low multiples and then over time not only did their earnings grow over time but so did the multiple and there's lots of examples of this there's one that I put in the book that the chip Maloney of micro-cap Club wrote up which is the most extreme example I found and so that's why I used it which was mty foods which went from trading it like three times earnings when nobody gave it credit for anything and at the end of ten years was trading for 27 times earnings so even though earnings only went up something like 12 fold it turned into 100 baggers so that really can really provide a very nice tailwind and there are other examples Gillette in the 80s was was one that I remember when I was trading something like ten times earnings at the beginning and at the end is trading for thirty times earnings and then there are examples on the other hand where you start off with a high multiple and earnings grow but your return isn't so great because the multiple went from 50 to 25 so that's an important quality to look for although we can't overdo it and what this table just shows you really quickly is it's basic math and you all know it but sometimes it's helpful to see it again which is the difference of having two companies one that grows twenty percent a year it grows earnings 20 percent a year one that does a ten and you can see after you know the end of ten years the amount of things that you get with the fashion grower is enormous enormous ly larger so even if you know you wound up paying 20 times earnings for company a and the end of the run you're down to ten times earnings you still you're still going to wind up probably much better than if you were with Company B so one lesson is that you know you have to take into account those growth rates and you shouldn't be afraid to pay up for something that's going to grow especially if you're pretty sure about it this one is really important high returns on capital almost all of these businesses that became 100 baggers were at the end of the day there are really good businesses and they earn very high returns on their capital and this reminds me of a Charlie Munger quote gotta have the obligatory mugger quote where he says that over the long term it's much harder for you to earn much beyond what the business earns on its capital so you know it's interesting experiment because people say well you know you have any hundred baggers or they want to kind of know the stocks that might be 100 baggers but the first step is really identifying those businesses and I would bet that if we were to you know say we had to come up with 10 names and collectively we all had agree 80% of us had degree before we put it on the put on the board that we could come up with a list of some very good really good good businesses I don't know if that's the hardest part I think the hardest part is is kind of knowing when to buy them and hang on that and that long so one other thing that and other speakers have talked about this this is something it wasn't really necessary in the study there are lots of stocks that went up a hundredfold that didn't have owner operators or the relatively faceless management teams you know you look at Gillette I don't know if the CEO of Gillette necessarily was you know so critical in that case you had just such a great business model but there were there did appear enough that it was important to have a face so when you think about some of these businesses you can think of the people involved if I say Walmart you know you think of Sam Walton but I think Microsoft you say Bill Gates Apple Steve Jobs and you go on on there's a there's often not always but often a brilliant entrepreneur behind these companies so there's a lot of other empirical evidence beyond more anecdotal 100 baggers study is just you know that in first off it makes intuitive sense when we think about the the kind of feedback you get when you're an owner versus if you're a hired hand and then there's a lot of additional studies so on this slide I have a few that I thought were interesting there's plenty plenty more I'm sure you can find many more studies but these are some that I thought were pretty good one of them just says historical stock performance of companies managed by a world's billionaires tend to outperform and the paper goes on to think to put forth a number of ideas maybe why that is billionaires are very well connected and they know people and they can get things done in ways that maybe lesser mortals can family a family led company is another one that's been mentioned again today and then there's plenty of anecdotal evidence the outsiders of course you've all probably read and Ian's book which I read last week which i think is also excellent has a number of great case studies most of these people who ran these companies that became huge successes were owners and they behaved like owners an older book that I like a lot is called silent investor silent loser it's been out of print for a long time but you may be able find a used copy it's a fun read and Martin sawn-off is a money manager has been a money manager since the 60s and he has a quote here that I you can read it but there's a part in here that I particularly like where he says that entrepreneurial instinct equates with sizeable equity ownership which I've certainly found to be true and when I look at companies like that's where I often start we'll start with the proxy and see who owns what and and what their incentives are so those are a summary of some of the things that have come out of the study in there I've written about them in the book that I think all these are important really the most important thing of all is something that Chuck upgrade to as talked a lot about so this is a this is him quote for me you can read it but it's really that idea of being able to reinvest so not only do you have to have a great business but it has to be a business that can then take all of its profits and reinvest and earn that same return again and again again and that's really where you get this sort of magical flywheel effect and then the most important lesson of all is just in looking at these sauces I think that it's it's there are two things really one is that it's both a roller coaster and it's also can be incredibly boring to hold on to these stocks so first the roller-coaster part is probably one you you are more we would think of first but just to take a couple examples like Apple for example suffered for different 40% drops over the last two decades including a 60 percent drop in 2008 on its way to 100x so that you know that's quite a challenge to be able to hold hold the business to those kind of draw downs another favorite of mine to use is Netflix which is a hundred bagger since 2002 and it's lost 25 percent of its value in a single day four times and that's really that's that's pretty brutal monster beverage which is a case study that I write about in the book it was a hundred bagger in a ten-year run but in that 10 year run it had a drop of more than 40% drop of more than 30% and had several 20% plus drops so you know the defense in there is you really have to know the business I think and even then it's going to test you psychologically and then it can be very boring so I just pulled out randomly it was really just eyeballing the companies there in a study I have this vast spreadsheet and you can just see there's lots of times when these stocks just went nowhere for for pretty long stretches so just to pick up a few Bank of New York Mellon went sideways from 1976 to 1981 amidst 100 x1 so if you own that stock and you just held it for about 20 years you up a hundred to one more than 101 but there was five years there was did nothing Texas industries was sideways from 1885 American Express was flat from 85 to 92 you know these are is they're very taxing things and I'm sure all investors most of your investors is room and you can appreciate how difficult it is to hold on to a stop for that long it goes nowhere because we're in the business and we see new ideas all the time and we get excited about things but the lesson of hundred baggers is that you have to hold on to these things for a long time my question is on the hundred baggers I've read some of your articles on that I love it I think you're you've really highlighted a great thing so don't take my next comment too snarky which is is a hundred x also a good sell sign because I can think of a lot of companies that hit their hundred X in the 90s Microsoft Oracle visor that haven't hit Cisco that are still selling for less today than they did 15 years ago yeah so should we sell at 100 X or should sell at 90 X or 100 TX it's a real high-class problem to have yeah I think that's what they call a high-class problem right do I sell at 100 extra 90 X yeah I mean that's it's almost a little bit like analogy with earthquakes is you know you don't know difference between a small earthquake and a big earthquake is it just small earthquake just keeps going becomes a big earthquake it's really hard to tell when they're done and I don't have a good answer to that other than to say that a lot of these that went beyond 100x you know there if again if you just focus on the business you would never have told it so I I would only I guess the main way I would answer that is to say they're really focused on the business not so much the price because you can have a stock go up 100x and still be a bargain when you're talking about in the late 90s definitely you know a lot of those stocks were outrageously priced it would be hard to hold on to those but I'm thinking of other stocks that I remember seeing the study that went up a hundred X and we're still free reasonably you know value they weren't ridiculous and you might have continued to ride it at the bit the economics were still in place yeah Amazon I'm thinking a monster beverage because again that was one that Apple or at much beverage of one of the ones that you know went well beyond 100x and again the economics of that business never really changed hi I'll caveat this with the fact that if I wasn't you know looking for this type of thing I wouldn't be in the room here but just to hear your point of view so there about 365 over the past 50 years or so if you look at the past decade there's a whole lot more private money out there that funds things much further up the growth path so if you look at when an amazon went public to Google to a Facebook it's just they're coming public later in the game where do you see you know the number of potential public market Humbert hunter baggers going over you know 20 years from now yeah that's a good question I think you know when you combine Phelps a study in my study you get to cover pretty broad 70 80 year period of time and there are all different points where you might say there would be more or fewer hundred baggers but the numbers is of any given time there's always there's always a bunch I mean there's always multiple multiple companies you could buy any month in any mark at any time it made 100x true I mean like in 1932 there's a lot more opportunity than there was say in 2000 so the market has some impact and what you're talking about is a more you know structural thing having to do with market today I don't really know maybe that that's true they would affect number fo going forward or not but i don't know i don't i don't necessarily worry too much about it again because i don't know that i get too hung up on if it's actually gonna be a hundred extra not i mean i'm just looking at companies that have these same kind of economics and and the supply is going to ebb and flow i'm not sure i have a really good answer to tell you about you know where they might be in the future yeah one I totally agree it's very difficult one key problem and I think is that before let's say over the last 50 years the if you did what Buffett did a lot of a lot of what he did is basically write very gradual disruptions like Walmart is was a disruption to my own pops and so he had time to understand and being able to predict certain businesses if you look at the last ten years disruption have become far more faster what took fifty years now can take three to five years yeah you know getting to a hundred percent penetration rate in the population you know if it was TV newspapers all that took 50 to 100 years now it's like a new mobile can take you know can get to ten million in like one or two years right which also means it will disrupt somebody else so that makes the whole thing more difficult yeah that you're here you a cannot escape you cannot escape dealing with with technology technological disruption as you could let's say over the last 50 years ya know that I agree that and that's empirically true there's a section in the book where I talk about the lifespan of companies and you can see you know you've probably all read this elsewhere where the it's shrinking and I think on the sp500 population it's maybe down to fifteen years or something like that so that makes it harder on the flip side I guess you could say that there the acceleration to get there as fast or to I mean the number of companies it you know they'd have those kinds of runs these days that do it in less time but the whole game is much more difficult it's it's really difficult to think of a business that you could sit on today twenty years it's not gonna that doesn't face some sort of existential threat from disruption somewhere it's definitely true last question we'll take a break so Chris amongst the things you you highlighted what you learned I was wondering if it's the same thing Tom Phelps learned in his study and the second part was what is the predictive power of these learnings like like if he learned similar things and if you do what is status change is just just people in statistics to call out-of-sample testing they tested over sample and then they tested the results over the sample for which from they have not drawn the conclusion so I don't know if I'm making myself clear which is you learn these seven eight things and then you apply it to a part of the sample from which you've not done the learnings and does it still hold so we're basically getting to what is the predictive power of these learn yeah yeah that's a good question so the first part was Phelps yeah I mean I think what Phelps there were the conclusions are very similar he I mean there's when you think about it there's only there's some basic rules here with a hundred bagger so to get to 100x you know you have to compound a certain rate over a certain time to get there and to compound at a certain rate you have to do certain things you have to have certain return on equity return on invested capital which apply certain margins which imply certain sales growth so some of its comes down to that and our conclusions were similar you know in his book he talks about other things investing abroad and he entered some different questions and I chose to focus on but the results between the two books is very similar if you read them both very similar as far as predictive goes some things are allowed or seeming are seemingly more predictive than others like the owner/operator thing is is I would say it's predictive and you can look at a number of studies and and see that as a class CEOs that have 10% or more of the stock against CEOs as a class that have less than 10% in stock they do better they outperform their higher guns in the book I talk about a couple other predictive attributes like for example high gross profit margin tends to be predictive and sticky so companies that have a 55% gross profit margin tend to keep it where as companies have a more narrow gross profit more that doesn't persist as much and again this is Anna data speaking of lots of input so there's lots there's always exceptions so that's that's an interesting one the gross profit high gross profit margin is interesting is predictive those are two the come in line right now maybe like if I think of another I'll let you know well I guess we're done but thank you very much for your attention your time

Channel: MicroCapClub

Views: 59,044

Rating: 4.9419689 out of 5

Keywords: microcap, microcaps, 100 bagger, chris mayer, summit

Id: KoOEE8GI-Ko

Length: 28min 29sec (1709 seconds)

Published: Tue Nov 15 2016

Reddit Comments

[u/[deleted]]

valeant went on to collapse ... "it's a good thing i didn't put that one in the book."

uh, what?