How can an investor spot "100-baggers" (stocks that return $100 for every $1 invested)? Looking back, it is an easy exercise. But thinking about what characteristics, qualities and strengths a business would have to have to convince an investor to select it and remain invested in it for a very long time is a harder problem.
But that is what Chris Mayer does in his book, “100 Baggers,” which includes a list of companies that have multiplied by 100 in the period between 1962 and 2014.
The strategy of investing in companies that have the potential to turn into 100 baggers demands a very high degree of conviction and a very long time horizon, coupled with a large dose of patience to endure the inevitable huge market swings.
Conviction
The idea of investing in a company for the next 10, 20 or 50 years really highlights the importance of the process of analyzing and thinking how the business works, what protects it and how his addressable market is going to evolve over time.
Conviction comes from that deep analysis. It comes from buying at a meaningful discount. It comes from holding valuable assets that are managed by extraordinary managers. Conviction is higher with companies that are run by owner-operators that buyback stock when it is trading at a discount and that look every day for ways to stretch their economic moat.
Warren Buffett (Trades, Portfolio) has told investors several times they should act as if they have a punch card with only 20 investing slots to improve performance. This means that each selected investment has to be perfect. And investors have to wait patiently for those right investments.
Time horizon
To get a 100 bagger, investors have to hold the investment a long time. If a stock returns 15% a year on average, it will take 33 years to be a 100 bagger. If a stock appreciates 30% a year on average, it will take 18 years to be a 100 bagger.
The capacity to remain invested a long enough to produce this extraordinary result comes from personality. Buffett always says that for an investor to be successful, they don’t need to be super-intelligent, they just need to have the right temperament.
In his book, Mayer presented a portfolio management concept that helps achieve the objective of holding investments for the long term: the “Coffee Can Portfolio."
“The idea is simple: you find the best stocks you can and let them sit for 10 years. You incur practically no costs with such a portfolio. And it is certainly easy to manage. The biggest benefit, though, is a bit more subtle and meaningful. It works because it keeps your worst instincts from hurting you.”
Case studies
The book “100 Baggers” provides several examples for every topic discussed. Additionally, six case studies are presented has examples of what an investor could have seen in them a priori to invest and hold them for the long term. In the next article, we are going to analyze the example of Amazon (AMZN).
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