Multi-Disciplinary Reading – Book Reviews

100 Baggers, Christopher Mayer, 2015 – Inspired by Thomas Phelps’ 100 to 1 in the Stock Market, 100 baggers goes down the same route to find characteristics of stocks that are 100 baggers. Fresh learning for me was very relatively low in this book, but by repeated hammering of old ideas, somewhere we can bridge the gap between knowing and doing.

My notes –

• Key to 100 baggers is not finding them, but keeping them. Buy right and hold on

• Investors crave activity, wall st. is built on it. Greatest fortunes are built by gritting your teeth and holding on

• Investors need to distinguish between activity and results. Lot of shavings don’t make a good workman

• Every sale should be considered a confession of error – shorter the holding period, greater the error

• Investors have been conditioned to measure stock price performance based on quarterly or annual earnings but not on business performance

• Early days of mutual fund industry, most funds had a decree that the shares of leading 30 companies once bought could never be sold

• Average lifespan of a firm in S&P 500 is now 20 years (Used to be 61 years in 1958). Avg asset life as well is reducing drastically (

• Phelps look at 19 multi-baggers suggests that

  • Most powerful stock moves happened with earnings growth and multiple expansion for extended period of time
  • Some opportunities happen in beaten-down, forgotten stocks returning back to profitability

• Utilities dont become 100 baggers. Knowing what not to buy is very important

• Retailers, beverage makers, food processors, tech firms etc. have become 100x

• Train your mind to look for ideas that could be big, to think about the size of the company now vs what it could be

• Monster Bev – 100x in 10 years between 1996-2006. 700x by 2014. High sales growth, margin expansion and RoE expansion. (Even buying in 2004 after it was well discovered and trading at 30x multiple could have made a 100x solely on earnings)

• Amazon – long runway for growth and large R&D investments that paid off is another 100x

• RoCE is very important. If company can continue to invest at high rates of return for long periods, there will be parabolic effect

• Other 100x mentioned – Electronic Arts, Comcast, Pepsi, Gillette

• If a business earns 18% RoCE over 20-30 years, even with an expensive starting price, you will have a fine result

• Over time return of a stock and its RoE coincide nicely

• If a company earns a high RoE for 4-5 years through margin expansion and not leverage, its a good place to start

• Bet on owner-operators with personal capital at risk – Jobs, Walton, Gates, Schultz, Buffett all created incredible wealth for themselves and shareholders

• Next best bet after owner-operators is bet on Outsider CEOs

• CEOs main job – Capital allocation, value per share (not overall size or growth), cash flow (not earnings), decentralized orgs, independent thinking, prudent buybacks and acquisitions

• Berkshire’s capital structure has about 37.5% of leverage – (but its at -ve cost of capital from insurance float most years, or at a avg. rate less than treasuries)

• Due to the leverage used to finance risk assets, Berkshire priced its policies to make profit and not compete with other insurers.

• Real wealth creation – not flying first-class wealth, but having-libraries-named-after-you kind of wealth

• Noah’s ark way of investing – being involved in 50-75 things and ending up with a zoo. Buffett puts meaningful amounts of money in a few things

• When done right buybacks can accelerate the rate of compounding (lack of other avenues for growth, stock trading cheap + actually extinguishing shares)

• A truly great business must have an enduring moat that protects excellent returns on invested capital

• Common moats – brands, switching costs, network effects, low-cost, large size advantage

• Creating an industry map and understanding where the profit pools are can help (Mauboussin)

• Beverage industry is a stable industry, trends there unfold slowly over time. Sodas don’t get disintermediated by internet (sort of moats to look for)

• High and resilient gross margins is the single most important factor of long run performance. Hard for a low gross-margin business to become high (GMs persist)

• Turnaround candidates – high gross margin business having low operating margin – the latter is easier to fix.

• True moats are rare and not so easy to identify. Moats can’t be identified from a firm’s financial statements. (If its not clear, you are probably talking yourself into seeing moats)

• Average mutual fund earned a return of 13.8% but avg. investor earned only 7% (poor timing)

• People are dying of boredom. They just want something to happen. People sabotage their portfolios out of sheer boredom. (boredom arbitrage is a thing)

• Usually market pays a premium – an entertainment tax for stocks with an exciting story

• Age of venality – there’s an unprecedented willingness to do dishonest things in return for money

• The more success and awards and public adulation a CEO gathers, the less likely they are to admit faults

• Reading conference call transcripts is better than listening to them. Read several quarters at a time and look for disappearing initiatives, changing narratives (I prefer reading and then listening to subtle “tells” where allocation is high)

• On Boards – boards rarely represent shareholders because directors consider directorship as a perk than a responsibility. Boards seldom find truth in any investigation (its like asking them to admit their own incompetence)

• On Auditors – audits are not “clean bills of health” and do not detect fraud

• China is to stock fraud, what Silicon valley is to technology

• Investing overseas is like swapping risks you cannot see for risks you can see

• Be careful around companies that seem to be created mainly to scratch an investor’s itch (like Droneacharya)

• People tend to make rosy forecasts of the future more often than not. Reality is often more volatile

• Sosnoff’s law – price of a stock varies inversely to the thickness of its research file (Best ideas are often the simplest)

• People do not have ideas – their ideas have them. Be way of fixed ideas (from ‘The Ego and his Own’)

• Ideas come from people and hidden stories do exist. There is a person somewhere who knows that story

• Under an inflationary environment, businesses that can pass on the cost and are asset-light (say see’s candies) do better than businesses with tangible assets (gold miners and oil stocks) – Buffett

• Asset heavy businesses generally earn low rates of return – barely enough to provide capital for inflationary needs of the existing business, with nothing left for real growth, for distribution to owners, or for acquisition of new business – Buffett

• Stocks unlikely to recover from a downturn are either – 1. Grossly overpriced 2. Suffered permanent impairment 3. Suffered massive dilution to cover for its misfortune

• When you buy a cow to milk, don’t plan to race her against your neighbor’s horse (If you bought it for dividends, don’t compare with another stock’s growth for eg.)

• When any rule or formula becomes a substitute for thought rather than an aid to thinking, it is dangerous and should be discarded

This can be a good book to convince oneself of long-term investing and its ability to create serious wealth over long periods of time by finding and holding a few great businesses through thick and thin. In an environment where a barrage of information with poor signal-to-noise ratio comes at us everyday making each day feel like a month, this is easier said than done. 8/10