Notes from 100 Baggers by Christopher W. Mayer

• Stock Screening:
  ** Present ROE > ROE 5 yr avg
  ** Independent Directors owning a % of shareholding

• Bet Size: Kelly Criterion (% = edge / odds)
  Another rule: (P% * 5) = 50 where 5 is the no of stocks & P is the percent in one stock (< = 12.5%)

• Quality company: Post one bad quarter, the stock doesn’t fall 35%. It falls 3% and then the ROE kicks in, and they are back to normal in no time.

• Exit Strategies: If the ROE doesn’t fall below 20% (OR) the valuation gets stupid.
  When people are easily willing to invest in a theme, its probably time to sell.

• Gross margin: They “are surprisingly resilient and do not contribute meaningfully to fade rates.” High gross margins are the most important single factor of long-run performance. If gross margins are sticky and persistent, then a good turnaround candidate would be one with a high gross profit margin and a low operating margin. The latter is easier to fix than the former.

• Moats: Moats aren’t permanent. Some forms of moats are strong brand, switching costs, network effects, lowest cost, biggest in domain. There should be a clear sign of a moat — if it’s not clear, you probably are talking yourself into it— you may also want to find evidence of that moat in a firm’s financial statements. Specifically, the higher the gross margin relative to the competition, the better

• Good v/s Bad industries: Airline, Paper, Forestry, Gold mining are bad. However, the industry isn’t destiny and money can still be made in airline industry in may ways.
  Suggested approach: Make an industry map with all the allied sectors – take the end product → go forward and backward. Now, look for the area where the profit pool is

• Frauds prevention tips? Where there are no antelope, there are no lions.
  It’s better to deal with people who have had past successes, stay away from things that you don’t understand, avoid hot sectors (ex: biotech, social media etc)

• Avoid asset heavy: The ideal business during an inflationary time is one that can (a) raise prices easily and (b) doesn’t require investment in a lot of assets.

Some Quick Tips

• Great CEOs are nothing but great capital allocators or great investors
• Value per share is what counts, not overall size or growth
• Sometimes the best opportunity is holding your own stock.
• Market often seems bored with just about anything that isn’t tech, biotech, social media or Tesla.
• Investor going overseas was often simply swapping risks he could see for risks he couldn’t see.
• People tend to forecast a future that closely approximated the present. Reality is volatile.
• History Lesson: General markets tend to come back strongly in periods subsequent to price crashes! That was the case in 1932, 1937, 1962, 1974–75, 1980–82, 1987 and 2001–2002.
• The price of a stock varies inversely with the thickness of its research file.
• Not all holding companies are slow compounders. ex: Berkshire
• Extreme predictions are rarely right, but they’re the ones that make you the big money.
• You have to look for them instead of being satisfied with 5/10/20 baggers → then sit tight
  One YoY performance isn’t enough to judge and the 100 bagger journey will take 20–25 years.

Further reading

• Security Analysis by Benjamin Graham & Dodd → for security analysis / financial accounting.
• The Outsiders by William N. Thorndike → for in general investing
• The Little Book That Builds Wealth by Pat Dorsey
• A Zebra in Lion Country, published in 1997
• Contrarian Investment Strategies by David Dreman
• Building a Profession by Benjamin Graham
• The ego and his own