I recently re-read Chris Mayer’s fantastic take on the key to long term success in the stock market. While most people would be thrilled with 10X returns, Chris does some digging on what are some ingredients to the secret sauce that is hundred-baggerdom! In the book, he looks at some of the common themes and qualities of these businesses that have provided 100X or more returns as well as specific case studies and ideas about how to think about them with the hope of being able to spot them earlier in the future.
I highly recommend you buy and read the book yourself as it is quick, easy to understand and enjoyable. While I won’t spoil or go into details here, here are some key take-aways from the book:
High quality businesses run by good management teams can make a good long term investment in many different industries. Demonstrated capital allocation skills and aligned incentives is a good sign and can often be found with “owner-operator” managers as opposed to hired guns who focus on short term quarterly earnings.
Buy right and hold on! Focus on the business and ignore the stock price movements as much as you can. A good mental model and if you can figure out a way to implement it - the coffee can portfolio would be the way to go.
Buying long term growth businesses is key if you are going to hold on for 20 years. Sustaining 10-20% growth per year at a P/E of 20 or even 30 is more important than buying a stock with a P/E of 10 with little to no growth. If they are cheap, that is even better but long term growth prospects are more important. The businesses should be generating lots of cash and have the ability to reinvest at attractive returns.
Focus on finding businesses that can demonstrate retaining earnings and reinvesting at sustained high rates of return (ROE or ROIC or whatever metric). In the book there are examples of ROE for years and years above 20% eventually resulting in stock performance that correlate to these returns over time, even if the price paid initially is not dirt cheap. High returns with minimal leverage risk would be preferred to avoid permanent losses along the way as the intent is to own these businesses over several business cycles.
There are not any magic formulas, sometimes you will be wrong but it is still worth trying. Having a somewhat diversified portfolio but not so much so that makes any single investment meaningless means you focus on buying businesses that you believe in long term (no junk).
Start small - it is hard to imagine Walmart or Amazon growing 100X from where they are even though they have a lot of the qualities you would want. Most of the case studies in the book started small but that is not to say you have to look for tiny companies. Small cap names around 500 million to 2 billion should come up with a decent universe to hunt in.
There are no get-rich quick schemes here. True success that can be repeatable (ie. not junior mining stocks that get lucky) take many years. Even in the best cases you would still have to wait at least 10 years and that is if you managed to time it well. Most take 20 or 30 years and because of how compounding works, it pays to wait.
There are other lessons to learn from this book that are worth your time. Some of the behavioral problems that face many investors (me included) are discussed in here with some ideas about how to overcome them.
If you have read the book and would like to share your thoughts, send me a note on twitter or here! I’d like to do more of these finance book topics slowly over time as a way to write my thoughts and hopefully engage with some of you.
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