Learning - 100 Bagger (C Mayer)

A very simple yet useful book on stock picking. The essence of 100 Bagger is aim for a 100 bagger.

In investment world an 100 bagger means Rs.1 invested becomes more than Rs.100 over decades.

The book is very simple and brings out the key factors to be considered while undertaking a stock market journey.

Book 100 Bagger by Christopher Mayer is worth reading.

My learning is reproduced below:

On Importance of holding and not selling

“One of the basic rules of investing is never, if you can help it, take an investment action for a noninvestment reason,” Phelps advised. 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—according to Phelps.

Phelps wrote as much: “Just a slight change in a golfer’s grip and stance may improve his game, so a little more emphasis on buying for keeps, a little more determination not to be tempted to sell . . . may fatten your portfolio. In Alice in Wonderland, one had to run fast in order to stand still.

In the stock market, the evidence suggests, one who buys right must stand still in order to run fast.” It is superb advice.

100 bagger table

Return	Years to 100-bagger
14%	35 years
16.6%	30 years
20%	25 years
26%	20 years
36%	15 years

  What is coffee can portfolio?

It all began with Robert Kirby, then a portfolio manager at Capital Group, one of the world’s largest investment-management firms. He first wrote about the coffee-can idea in the fall of 1984 in the Journal of Portfolio Management. “The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress,” Kirby wrote. “The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.”

Buffet change in investing style

“In Buffett I,” Jason said, “the prediction of future cash flows is not that big a deal because all you’re trying to do is buy something really cheap in relation to the current year’s balance sheet or the current year’s income statement. “In Buffett II,” Jason continued, “he has to have some sense of where earnings are going. And that’s why he won’t invest in any companies he can’t understand, because he can’t project earnings.”

Great place to start i.e. initial screening

Jason starts his process by screening the market, looking for high-ROE stocks. “If a company has a high ROE for four or five years in a row—and earned it not with leverage but from high profit margins—that’s a great place to start,” he said.

From initial screening what is the next most important

But ROE alone does not suffice. Jason looks for another key element that mixes well for creating multibaggers. “The second piece requires some feel and judgment. It is the capital allocation skills of the management team,” he said. Here he ran through an example.

Say we have a business with $100 million in equity, and we make a $20 million profit. That’s a 20 percent ROE. There is no dividend. If we took that $20 million at the end of the year and just put it in the bank, we’d earn, say, 2 percent interest on that money. But the rest of the business would continue to earn a 20 percent ROE.

“That 20 percent ROE will actually come down to about 17 percent in the first year and then 15 percent as the cash earning a 2 percent return blends in with the business earning a 20 percent return,” Jason said. “So when you see a company that has an ROE of 20 percent year after year, somebody is taking the profit at the end of the year and recycling back in the business so that ROE can stay right where it is.”

A lot of people don’t appreciate how important the ability to reinvest those profits and earn a high ROE is. Jason told me when he talks to management, this is the main thing he wants to talk about: How are you investing the cash the business generates? Forget about your growth profile. Let’s talk about your last five acquisitions!

On not paying dividend

“Obviously,” Phelps concludes, “dividends are an expensive luxury for an investor seeking maximum growth. If you must have income, don’t expect your financial doctor to match the capital gains that might have been obtainable without dividends. When you buy a cow to milk, don’t plan to race her against your neighbor’s horse.”