Recently I came across the book, 100 Baggers, by Chris Myers. The book presents a case study of 100-bagger stocks, i.e., stocks that turned $10,000 investment into a whopping Million Dollars. The book promotes a rather simple, yet fundamental concept of “buy and hold”, rain or shine. In addition, there are several key nuggets spread through the book that value investors such as myself will cherish. Below is a brief summary (in no particular order) of these nuggets of wisdom:
- On book-value-per-share: When a company can build book value per share over time at a high clip, it has the power to invest at high rates of return.
- On difference between Buffet-I and Buffet-II:
- In Buffet-I (looking for cigar-butt stocks), the prediction of future cash flow is not that a big deal because you are trying to buy something really cheap in relation to the current years balance sheet or income statement
- In Buffet-II (look for good companies trading at fair value), Buffet has to have a sense of where earnings are going and therefore he will not invest in companies that he cannot understand
- On Return-on-Equity:
- A great place to start is to start looking for company that has a high ROE for 4 to 5 years in a row and earned it not with leverage but with high profit margin.
- When you see ROE of 20 % year over year, some one is taking the profits at the end of the year and recycling back into the business so that ROE remains where it is
- High quality stocks are those that do not fall 35 % in bad markers, rather they fall 3 % and then ROE kicks in
- On Gross Margins: Gross margins are surprisingly sticky and do not contribute meaningfully to fade rate (or mean reversion)
- On Passive Investing using ETFs:
- The people who like to make ETFs, like to put big liquid stocks in them. Companies that are controlled by insiders tend to be illiquid relative to their peers, thanks to the large stake of controlling owners. As a result these types of owner-operated businesses tend to get mis-priced
- The presence of owner operated can by itself be a signal of value
- As people pile onto ETFs, that ETF has to go out and replicate its set portfolio-regardless of what prices for the stocks are
- On Boredom Arbitrage:
- Quote from Pascal “all men’s miseries derive from not being able to sit in a quite room alone”
- Market pays, what may be called a entertainment premium for stocks with exciting story. As a result, boring stocks sell at a discount.
- On Best CEOs (borrowed from Book by Thorndike, The Outsiders):
- Best CEOs are all great capital allocators
- They have five basic options for capital allocation: invest in existing operations, acquire new businesses, pay dividends, pay down debt or buy back stocks.
- Over a long term share holder return will depend on how effectively the CEOs use these available options
- In general, great CEOs disdain dividends, make disciplined (and occasionally large) acquisitions, use leverage selectively, by back lots of stocks, minimize taxes, run decentralized organization and focus on cash flow
- Investment quotes:
- Investing is one sphere of life and activity where victory, security and success is always to the minority and never to the majority
- In investing, never cry over spilled milk
- In markets you make more money sitting on your ass
- I invest knowing fully well that I may loose big on any position. Overall though, I know I will turn in an excellent result