100 BAGGERS: STOCKS THAT RETURN 100-TO-1 - YouTube

In this video, I will present the five main takeaways from

100 baggers: Stocks that return one hundred to one and how to find them written by Christopher Mayer

Before we jump into the takeaways a quick explanation of what a "bagger" is might be appropriate

it's an expression from baseball where a base is also referred to as a "bag" and a

ten bagger is two homeruns and

double bottom line, a very successful play

The term was coined by Peter Lynch, in his "One up on Wall Street".

There he references to these 10 baggers, which are stocks that increase ten times in value

And he also reveals his investing strategies on how to find them

This is a book about hundred baggers, which are stocks that increase 100 times in value

$10,000 invested in a hundred bagger turns into one a million dollars

A staggering increase

Managing to pick just one hundred bagger in one's lifetime will probably secure your personal finances, and cap potentially finance a retirement

For this book Christopher Mayer studied 100 baggers during the period in 1962 to 2014 in total

365 companies and their characteristics were used to draw the conclusions in this book

Let's take a look at Christopher Mayer's suggestions on how to invest in stocks that return 100 to one

Takeaway number one: buy puppies

First things first

You must look for companies that are able, I mean basically from a mathematical standpoint, to become 100 baggers

Large companies are not necessarily bad investments

but if you are looking for hundred baggers

these should not be your priority. If you look at Microsoft or Apple for instance

they already have a market cap of around a trillion dollars,

which means that you must be quite creative to imagine that either one of them will grow a hundred times from here

and would one of them achieve that they would be roughly five times larger than the US economy is today

Instead

concentrate your research on smaller companies, the puppies, that can grow say

10 to 20 times and still be regarded as small

The good thing is that you don't have to find say Apple while the founders are still working from their garage, or

Starbucks with only one store selling coffee beans

Even many years later there were still opportunities to hop on the wagon and enjoy hefty returns in these companies

There are approximately 4,000 domestic companies listed on the U.S.

Stock exchanges today among which, approximately 30% are small puppies, so-called micro caps.

This is a vast area to explore and, somewhere in this pile is the next Apple or Microsoft

With that said, you should perhaps not look at the smallest companies either, with

unproven products and no sales. In the study that gave rise to this book, the

365 companies that later experienced increases over 10,000 percent had median sales of

175 million dollars

Christopher Mayer suggests that you should draw the

"puppy-line" somewhere around a billion dollars, but avoid the puppies who aren't even born yet

Takeaway number 2: The twin engines

Something that the hundred baggers of the last 50 years have had in common, is growth - in all its dimensions

Christopher Mayer suggests that you should invest in companies that can enjoy both a strong growth in sales,

but in valuation multiples as well

Growing sales combined with, for example,

growing the price to earnings multiple is something he refers to as the "twin engines"

Let's start by having a look at the first engine: sales growth

The sales growth is essential in order to grow a company's valuation hundredfold

If the growing sales also finds its way down to the bottom line, and increases the net earnings,

that is extra beneficial as it will most likely increase the valuation multiples quicker

That is not a necessity though

Just take Amazon as an example. It has had a tremendous sales growth, but the actual earnings ...

Well, they have lagged behind

What you should be looking for are companies with a disruptive product service or business model where the company is

reinvesting the earnings in the business to become even more competitive in the long term.

So first engine: sales growth

The second engine is the "multiple growth" or "multiple expansion"

Given that the multiples of the company aren't too expensive from the beginning, high growth is usually rewarded with higher valuation multiples

This is the twin engines at work. Let's consider the arithmetic.

As an example,

we'll use a company that currently has a price to earnings multiple of 15 and sales of about 200 million dollars

If it can increase its sales by a hundred percent, the stock price will increase by a hundred percent as well,

given that the multiples and the profit margin remains the same

Two hundred percent and the price will increase by two hundred percent

But what if we split that? So that the company grows a hundred percent in sales and a hundred percent in valuation?

When the two endings are working together

they strengthen each other and the end result is not just a 200% increase but a

300% increase in the stock

On the opposite side of the spectrum are stocks with very high valuations. For those,

one of the engines will work against you and the company will need to achieve very high growth rates in sales to compensate for it

So, search for companies that grow at a high pace

But try not to pay too much for them so that you can enjoy the twin engines

Takeaway number three: Owner-operators

According to Christopher Mayer: Ultimately, it's 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

This means that when it comes to investing, you should make sure that the operators of the company, that is their board of directors, the

CEO and so forth, have the right incentives for making the best decisions from the perspective of shareholders

If these operators own large parts of the company, they'll loose money if the company performs poorly and

gain money if the company performs well

This type of situation is what you must look for as an investor

Let's take Jeff Bezos as an example

He started Amazon when he was 30. He's now 55,

continues to run Amazon and still owns about

12% of the company

You can be sure that he won't make some short-term decisions in order to reach some

"quarterly sales quota"

He will, to the best of his abilities, make long-term decisions that, by extension, also will be the best for long-term

shareholders. If the plane that is Amazon crashes, the pilot that is Jeff Bezos

will crash with it

Just as it ought to be.

For more on how to find great managers, please see my summary of The essays of Warren Buffett

Takeaway number four: The coffee can portfolio

The coffee can

portfolio is a method dating back to when people hid their most valuable possessions in a coffee can and put it under the mattress

The method on how to invest in a hundred baggers

is basically the same - pick the best stocks you can find and then put them in the coffee can!

The average hundred bagger required 26 years of holding before reaching its 100x status

Did I hear someone say passive income?

Christopher Mayer makes the similarity between an investor and a fish

A fish only eats a bait that moves and if the bait doesn't move, well, the fish doesn't care about it

Same thing often goes with investors

Stocks that don't move are often sold due to lack of action

Even though the fundamentals of the company moves steadily in the right direction!

Also, stocks that underperform for a short period of time are often sold, again,

even if the underlying business moves in the right direction!

Take Monster Beverages as an example

On quite a few occasions, the stock has lost

20% or more in value within a month and on one occasion as much as 40%

There were many situations in which it was probably tempting to sell the stock

But gee, would that have been a mistake as it became a hundred bagger in just 10 years!

The best investors often say that the greatest enemy to superior returns are ourselves and our human traits

Greed fear, etc

However, different time periods of an investments lifetime are affected differently by these damaging traits

You are often most rational when you don't own the stock

The coffee can portfolio uses this as an advantage

After your due diligence is done and you have made a purchase, just put the stock in the coffee can and leave it be

This is a way to protect you from yourself

You can view this as a boredom arbitrage

As Warren Buffet puts it: "The stock market is a device for transferring money from the impatient to the patient"

So buy right then sit tight. This is how to make money in hundred baggars

Takeaway number five: Ignore the macro analyst

When you have invested in a potential 100-bagger, or are looking for new opportunities, you should ignore whatever the FED is doing,

who's the president at the moment, and what's currently going on in China

Put blindfolders on and focus your strategy on analyzing and finding hundred baggars

Because, these jewels they continue their journeys, even during recessions

The management of these companies seldom care about the current interest rates or Trump's latest tweet

They only care about the great products and services that they sell, and so should you

As quarterly earnings are presented also during times of recession,

companies that make headway and can show high demand of their product are rewarded by the stock market,

even though it might be the autumn of the year 2008

When you have spent time and effort on analyzing these stocks with a great future

potential you don't want to miss out of the gains because a macro analyst might suggest so

Let's take a quick example from the financial crisis. The retail company Dollar Tree,

which just so happens to be a hundred bagger, grew its revenues from 3.9 billion dollars in

2007 to 4.2 billion dollars in 2008. That's a seven percent increase even in a recession

The stock was rewarded by increasing from about 7.5 dollars per share

to 14 dollars per share during that time - almost a 100 percent increase!

While the S&P 500 during the same period lost about 40 percent of its value

This merely works as an example of why it may be stupid to care about the macro hassle when you have

successfully found a company that should be put in your coffee can portfolio

Timing the market is hard

Finding hundred baggers is no easy task either

Don't try to do the combination.

So: blindfolders on. Ignore president Trump and Xi Jinping, and focus on the task at hand:

finding those jewels

That's it on how to invest in stocks that return 100 to 1

Let's have a recap, before you enter the stock market jungle for your hunt

Focus on companies that still have a long road to travel but make sure that they are currently on the right path

Look for companies that can continue their growth for years to come and where there's still room for higher

valuation of multiples: the twin engines

Only board the plane if the operators are on board too

Avoid emotional errors by putting your stocks in the coffee can

Turn off the news, stop checking the total value of your portfolio every day, smash that like button and

focus on finding the future hundred baggers, no matter the market sentiment

Big thanks to my friend Richard Dykes for helping me in making this video. Bye for now!