100 Baggers is a book on finding and keeping stocks that increase 100X their value after purchase. The book was published in 2015 and has 220+ pages. the book details 365 companies that have returned 100X their value.
Book notes and summary
“Every human problem is an investment opportunity if you can anticipate the solution”. Except for thieves, who would buy locks?
Phelps figured out a few things about investing. He conducted a fascinating study on stocks that returned $100 for every $1 invested. Yes, 100 to 1. Phelps found hundreds of such stocks, bunches available in any single year, that you could have bought and enjoyed a 100-to-1 return on—if you had just held on. His basic conclusion can be summed up in the phrase “buy right and hold on.” Investors need to distinguish between activity and results.
What investors should do is focus on the business, not on market prices.
“Bear market smoke gets in one’s eyes,” and it blinds us to buying opportunities if we are too intent on market timing. The greatest fortunes come from gritting your teeth and holding on.
“There is a Wall Street saying that a situation is better than a statistic,” Phelps said. Relying only on published growth trends, profit margins and price-earnings ratios is not as important as understanding how a company could create value in the years ahead.
Don’t sell just because the price moved up or down, or because you need to realize a capital gain to offset a loss. You should sell rarely, and only when it is clear you made an error. One can argue every sale is a confession of error, and the shorter the time you’ve held the stock, the greater the error in buying it.
There are lots of ways to make money in markets, just as there are many ways to make a good pizza. Nonetheless, there is something to be said for a good pizza that almost anyone can make with the right ingredients.
We’re looking for insights and wisdom, not hard laws, and proofs. Investors have been conditioned to measure stock price performance based on quarterly or annual earnings but not on business performance.
The Biggest Hurdle to Making 100 Times Your Money
The biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.
Analysis of 100 Baggers:
• The most powerful stock moves tended to be during extended periods of growing earnings accompanied by an expansion of the P/E ratio.
• These periods of P/E expansion often seem to coincide with periods of accelerating earnings growth.
• Some of the most attractive opportunities occur in beaten down, forgotten stocks, which perhaps after years of losses are returning to profitability.
• During such periods of rapid share price appreciation, stock prices can reach lofty P/E ratios. This shouldn’t necessarily deter one from continuing to hold the stock.
The key to 100-baggers
Many 100-baggers enjoyed high ROEs, 15 percent or better in most years. It’s important to have a company that can reinvest its profits at a high rate (20 percent or better). ROE is a good starting point and decent proxy. I wouldn’t be a slave to it or any number, but the concept is important.
Owner Operators: Skin in the Game
Keep the list of names relatively short. And focus on the best ideas. When you hit that 100-bagger, you want it to matter.
100-baggers distilled: essential principles
- You Have to Look for Them: “When looking for the biggest game, be not tempted to shoot at anything small.” You only have so much time and so many resources to devote to stock research. Focus your efforts on the big game: The elephants. The 100-baggers.
- Growth, Growth and More Growth: You want to focus on growth in sales and earnings per share.
- Lower Multiples Preferred: Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs, as you’d expect. It is rare to get a great business at dirt-cheap prices. If you spend your time trolling stocks with price–earnings ratios of five or trading at deep discounts to book value or the like, you’re hunting in the wrong fields— at least as far as 100-baggers go. You may get lucky there, of course, but the targets are richer in less austere settings.
- Economic Moats Are a Necessity: A 100-bagger requires a high return on capital for a long time. A moat, by definition, is what allows a company to get that return.
- Smaller Companies Preferred: Start with acorns, wind up with oak trees. The median sales figure of the 365 names in the study was about $170 million.
- Owner-Operators Preferred: Having a great owner-operator also adds to your conviction. I find it easier to hold onto a stock through the rough patches knowing I have a talented owner-operator with skin in the game at the helm.
- You Need Time: Use the Coffee-Can Approach as a Crutch: Once you do all this work to find a stock that could become a 100-bagger, you need to give it time. Even the fastest 100-baggers in our study needed about five years to get there. A more likely journey will take 20–25 years.
- You Need a Really Good Filter: Don’t fret so much with guesses as to where the stock market might go. Keep looking for great ideas. If history is any guide, they are always out there.
- Luck Helps: Just as in life, so in the pursuit of 100-baggers. Good luck helps.
- You Should Be a Reluctant Seller: If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never. Sell if: You’ve made a mistake—that is, “the factual background of the particular company is less favorable than originally believed.” The stock no longer meets your investment criteria. You want to switch into something better—although an investor should be careful here and only switch if “very sure of his ground.”