100 Baggers by Chris Mayer
Review & Rating: 8.89/10
While the book’s title and subtitle focused on the goal of finding 100-bagger stocks, it taught core principles for investing in general. I loved the book. But I’m biased and I fed my bias by reading a book by someone who shared my philosophy. Still, I found myself having skepticism and disagreements for a nice one-sided conversation.
The most important principle for finding 100-baggers, but really for any long-term investment, was prescribed as investing in companies that have generated high returns on capital and can reinvest into subsequent opportunities that will deliver high returns on capital. It’s as simple as that.
In fact, simplicity is at the core of good investing. Simplicity isn’t for others to look and understand. It’s unique for the investor. It’s simple because the lollapalooza effect happens within the mind from the investor’s unique circle of competence. It doesn’t have to make sense to others.
But therein is what I consider to be the most important lesson of the book. Investing is about people. It’s about developing the self-awareness of who I am as investor. But it’s also about researching and trying to empathize with the people leading and building the businesses I invest in.
Most 100-baggers were great businesses and most didn’t get there because they happened to be in industries with great economics. They generated value for shareholders thanks to the talent of those who ran the businesses.
I don’t know if I would recommend it to someone new to investing. It’s an easy read and Mayer’s writing style was pleasant and conversational. The concepts were simple as well. But I hesitate because I think readers may get far more out of the book if they have a level of self-awareness as investors.
I don’t know if this book will help me find 100-baggers—I think it’s up to me to decide that for myself. But it left me thinking far more about my own investment process, how to think about businesses as investments vs. standalone enterprises, and more book recommendations. That’s a win, isn’t it?
Book Notes:
“Except for thieves, who would buy locks?”
Look at companies that do something good for humanity. Not all will be awarded but it makes sense that they would fare well.
Financial figures look at what came before. Look at how the business will create value going forward where there are no figures laid out.
Holding businesses doesn’t mean neglect. It’s an antidote against stupid actions.
Berkshire went from $8 in 1962 to $80 in 1972. Then it went to $38 in 1975. It was $98 in 1976 and $775 in 1982. It’s $485k in 2022. Buffett took over the leadership duties in 1971 and went through a full rebuild by the early 80s. The ’80-'86 period was when Buffett prioritized the human factors over the financial factors.
Things to consider when investing:
Cheap price (matters to get 100x). MTY Food Group trade at 2x fwd P/E before becoming a 100-bagger
Multiple expansion + growth in profitability are the two drivers of appreciation. MTY’s P/E went from 3.5x to 26x over 10 years while EPS grew by 12.4x.
High gross margins (50%+)
Long runway = small leadership position in a fragmented industry
It’s all about growth in sales, margin, and valuation. All are required. A 21% CAGR over 25 years is a 100 bagger. Long-term growth. But beware of overpaying for the growth. Price matters.
Mayer’s acronym for 100-baggers: SQGLP
S: small size (68% of 100-baggers in study had mkt cap below $300m)
Q: high quality business + management (large shareholder/founder) + people + culture
G: high growth in earnings (or maybe free cashflow)
L: longevity in quality + growth
P: favourable price (many had long periods to purchase)
The catalyst of it all is the people. Top management teams are what make it all happen.
“In the ultimate analysis, it is the management alone which is the 100x alchemist. And it is to those who have mastered the art of evaluating the alchemist that the stock market rewards with gold.”—Motilal Oswal
Employee-related expenses are seen as annual expenses but their benefits can last several years. Consider how this will translate long term on whether an employee stays, develops, and contributes to the growth of an organization. These are the conceptual factors that’ll matter to a company’s ability to compound. It won’t be obvious just by looking at the numbers.
Growth is the name of the game for 100-baggers. Lots of growth. Growth in earnings, margins, and multiples for a long time (i.e. 10, 20, 30 years!). That limits the possible universe to small companies by default. Large companies have already grown a lot.
If you had bought AMZN in 2003 (10 years after its IPO, that’s 10-years of public data) it would’ve returned 15x or 26% compounded annually by 2014. While 1999 might’ve been far too expensive, opportunities came to buy a business with a long runway later on.
A lesson from Peter Lynch: opt for the 20% grower at 20 times earning over a 10% grower at 10 times earnings. The distinction here is that the 20x business needs to be one that isn’t just fast-growing in the short term but also one that has the ability to grow long term given a longer runway (it needs to fit into the reasonable realms of reality) and a good business at that. It needs to be a business that might already be the leader in the under-penetrated market. It also needs to have a business model that works. Not one that grows fast but has no way of making money or even generating high returns on the capital.
ROEs, ROICs in combination with margins over a period of time are indicators of business quality. A business that can maintain high margins and ROEs (with minimal debt) for 5-10 years so a level of resilience that might showcase the existence of some kind of moat. But as always, investing is forward-looking and the question of what the business will do in the future looms with the culture and management team that will need to be able to deliver similar or greater incremental returns with greater capital. This is where the runway also matters for the management team to redeploy for greater growth.
Often, a high ROE but slow sales growth (single digit %) indicate a business that has hit the end of the tarmac. It no longer has the opportunity to redeploy that capital and that incremental return is what gives the business value long term. Without it, it’s just about getting paid the cash all out as dividends. For it to be a 100-bagger, it needs high ROE with high growth.
Smart entrepreneurs hit singles, not home runs.
Look for owner-operators:
“My experience as a money manager suggests that entrepreneurial instinct equates with sizeable equity ownership…If management and the board have no meaningful stake in the company—at least 10 to 20% of the stock—throw away the proxy and look elsewhere.”—Martin Sosnoff, Silent Investor, Silent Loser
Look into the research of Ruediger Fahlenbrach. He found founder/CEOs and they invested more in R&D and focused on building shareholder value more than hired CEOs.
As shareholders, why wouldn’t we want to see insiders like the CEO and chairperson investing alongside us? Shouldn’t we expect the same? Shouldn’t we expect them to be even more invested than we are when they hold all the cards?
At the end of the day, it’s people who start, build and operate businesses. The numbers are the by-products that depict a past.
“In this age of over quantifying everything, we lose sight of the fact that it really comes down to the people running the business."
Some factors to also consider for stability but also the culture of the organization: low borrowing, profits throughout economic cycles, low turnover in senior executives, aligned incentives for all stakeholders, decision-makers have personal capital at risk.
Looking at Thorndike’s Outsiders, the most ideal situation would be to have management that invests in the business or acquires using internally generated cash flow. There are more options in the toolkit, but I also look at those who to the former as having a certain type of character.
The industry doesn’t matter. The people running the business are what matter. The 100-baggers are those that defy the economic odds. They’re the ones who put base rates to shame. Airlines are a shit industry but Southwest Airlines was a 100-bagger.
“Industry is not destiny.”
Still, the nature of slow-changing industries may lead to future 100-baggers having enough time to build.
Moats are how companies fight mean reversion.
Learnings from Thorndike:
Value per share is what matters
Cash flows. Not earnings.
Decentralization release entrepreneurial energy
Independent thinking organization; ignoring others, not doing things the way others do
Insider ownership
Patience and occasional boldness in acquisitions
Simplicity of focus
Constellation Software is a 100-bagger since IPO. Berkshire is 18,000x from 1965 to 2015 (it turned $10k into $180m).
Buybacks don’t mean squat when it doesn’t reduce the shares outstanding. Remember that for the companies that issue egregious amounts of equity compensation. A lack of discipline in equity comp also shows a lack of discipline in the character of management. They should know better.
Looking at aspects like a strong brand, switching costs, network effects, economies of scale, or low-cost operator…the latter is the only one that relies on the discipline of the company. I think being the low-cost operator is the only one of the competitive advantages that are within the company’s control in the most direct way.
It’s not about the total market share. It’s about relative market share and how many players the market can support. A 40% market share might not be as valuable when there are two other competitors that are 30% each. Some might be able to support one player at 55% market share and no other large players after that. Some might have 1 be 20% and the rest be split up among 200 others.
A great product is not a moat. It doesn’t even mean a good business. At a bare minimum, it has to be clear how and where the company adds value to its customers.
Gross margins have been shown to be resilient to fade rates. Long-term resilience in gross margins is a possible indicator of moats existing. Low gross margin businesses tended to keep that and the same for high gross margin ones. GMs persist.
So companies with high GMs and low operating margins may have the upside (and room) to improve operating margins in the future. It might also be an indicator of a company that is investing heavily today.
Winners win. Long-term high performance has a tendency of persisting. The ones that skyrocket into success fall down just as quickly.
If a moat isn’t obvious, then you might be grasping at straws. Rationalization is a dangerous thing. Be humble. You aren’t the special one that figured out something no one else did here.
Invest and try to get the best returns you can over a long time for the investor you are. Don’t worry about what the indices are doing. That’s the advantage of the individual investor.
Fight boredom. People today are far too inundated with distractions. It makes their threshold for boredom low. So they go out to do dumb, meaningless things. Most of the dumb, crazy shit people do to show the world is because they’re bored.
Protect your time and protect yourself from all the distractions and you’ll never be bored! If you do get bored despite all that, embrace it. It’s a wonderful state for thinking and creativity.
“…all men’s miseries derive from not being able to sit in a quiet room alone.”—Blaise Pascal
“Usually the market pays what you might call an entertainment tax, a premium, for stocks with an exciting story. So boring stocks sell at a discount. Buy enough of them and you can cover your losses in high tech.”—Ralph Wanger
On auditors: “Whose bread I eat, his song I sing.” It’s a profession where negative results are rewarded with lifetime employment. So why would anyone do their job and write up a “qualified” report? I know no one got the better end of that deal.
Home country bias is fine. It’s all a matter of investing in what is in your circle of competence. Not what some backtest stat is right or wrong. That’s revisionist history.
“Phelps said in his book an investor going overseas was often simply swapping risks he could see for risks he couldn’t see.”
The hottest and shiniest parts might have great long-term promise from upstanding people. But they will bring the crooks, frauds, and tourists that’ll throw trash everywhere. Avoid, avoid, avoid until no one cares about it anymore.
The world is biased towards over-optimism in good times. The pessimists use that to sound smart and contrarian. For yourself, temper your optimism. But be optimistic, no better way to live life.
The investment profession according to Ben Graham:
“They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can’t do well.”
No one can forecast all that matters. They can’t forecast growth, yields, or rates. They might luck into one but will be horribly off on the rest.
“Extraordinary performance comes only from correct non-consensus forecasts.”—Howard Marks
Remember that non-consensus doesn’t mean the opposite! Just different.
Don’t try to predict/guess what’ll happen later. Focus on the opportunities in front of you.
Fight downhill battles. Choose effectiveness over effort. Less is more at times. Here’s Sosnoff’s law:
“...the price of a stock varies inversely with the thickness of its research file. The fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those appreciate the most.”—Martin Sosnoff
The best ideas are often the simplest. They are simple to YOU. They make sense to you and they are simple to you because it’s obvious to your knowledge. I think the test for ideas that are within your circle of competence is that they are so simple you get it….because all else you will wonder if you get it. Often, it means you don’t and you’re chasing.
Be suspicious of abstractions. Beware of the big ideas and trends. Often, there isn’t anything concrete about them.
Investing is always about people.
If you want to protect yourself against inflation, invest in businesses that rely on their people than goods. Monetary depreciation favours the business dependent entirely on the brains and efforts of their people. The caveat here is that the people-driven companies need to look at each person as being capable of doing multiples that of an average person and not see each person as a commodity….those companies will fall inevitably see their people as no different from the heavy machinery asset-heavy companies invest in.
Three types of stocks unlikely to make a comeback after a crash per Marty Whitman:
The one you paid an outrageous price for.
The business has suffered permanent impairment in their ability to do what they do.
Companies that had massive dilution where equity was used to pay for everything from compensation to debt.
Investing is a minority sport. Only a few win. You win when others don’t agree with you, specifically, when the big money doesn’t agree with you. It’s when the big companies want to come in en masse that you should look at as the opportunity to hold then get out. But you may also want to stop yourself from going into places that are already favoured in the appetites of the big funds.
When buying businesses after a market crash, prioritize the balance sheet. If the business is sound and has the ability to withstand a depression, then it’ll probably bounce back. But survival is the most important.
Finding a business that has been outstanding is one thing. It’s another to find one that can continue to reinvest to earn high returns on capital in the years to come. This is what Mayer calls the most important principle of finding 100-baggers.
Price matters. You need multiple expansion. But don’t forget that 100-baggers will already have fans. They will be great businesses that may trade near highs at all times. Sometimes, 25x FCF is a bargain, and sometimes 50x can be too. But the equalizer is consistently high returns on capital and the ability to reinvest at that high rate over and over again.
A company’s ability to hire top talent, develop them and retain them is an example of reinvesting at higher rates of return over and over again. Culture compounds and a company that can use that to bring better and better talent is showing its ability to reinvest over and over again.
“To me, investing is stocks is interesting only because you can make so much on a single stock. To truncate that upside because you are afraid to lose is like spending a lot of money on a car but never taking it out of the garage.”