Main Idea: “buy right and hold on.”
Inactivity has a mathmetical advantage.
People crave activity. If you open the news you are bombarded with buy/sell. This is counter intuitive but a lot of activities doesn’t improve your result in this game.
“In Alice in Wonderland, one had to run fast in order to stand still. In the stock market, the evidence suggests, one who buys right must stand still in order to run fast.”
Focus on business, forget price
What investors should do is focus on the business, not on market prices.
He talked about his friend, Karl Pettit, who sold his shares of IBM stock many years ago for a million dollar to start his brokerage business. That stake would eventually go on to be worth $2 billion. This was way more than he ever made in his brokerage business. It’s a powerful example.
Instead of focusing over P/E, margin and all the financial metrics, ask yourself, how a company could create value in the years ahead.
You shouldn’t sell because price went up. You should only sell when you realize you have made a mistake in understanding the story. Every sell is an acceptance of a mistake.
Hindsight and Survivorship bias
Hindsight bias: When something seems obvious after it happens, even though it wasn’t clear before. It happens when we see a stock go up and we think that it was so obvious. I think we need to look for factors that made it succesful.
Survivorship bias: Survivorship bias is when you focus only on the successful examples, ignoring those that failed, leading to a skewed view of reality. This happens when we see a succesful company without understanding that there were other similiar companies that failed.
Boring big companies
He gives an example is how as a young kid if he had just started accumulating ExxonMobil which was the largest stock at that time. $1 invested in 1971 would have been $418 plus dividend. It would have been the most obvious thing to do.
Can you hold on? Then you deserve a hundred bagger
The biggest obstacle in having a 100 bagger is to be able to live through the ups and down of the stock prices over the years. It reminds me a saying of Warren Buffet: “It’s a game of temperament not IQ.”
Anohter idea I liked is how ownership of assets is our best long-term protection against calamity.
Good materials to read for 100 baggers
An Analysis of 100-Baggers.” You can find it free online. Idea: The most powerful factor in making of a hundred bagger is the expansion of P/E.
Motilal Oswal put together a study of 100-baggers in India.
A good case study of a 100-bagger posted on the Microcap Club’s website by Chip Maloney.
Twin engine for multi bagger – low p/e, and growing eps
Requirement for a multi baggers (S, Q, G, L, P/E)
S—Size is small.
Q—Quality is high for both business and management
G—Growth in earnings is high.
L—Longevity in both Q and G
P—Price is favorable for good returns.
P/E – A low entry price
Benefit of a top entrepreneur
You want to invest in an owner operator business. Look if management and board have meaningful stake in the company atleast more than 20%.
Low P/E – A requisite to allow earning expansion – second motor
Know what not to touch
To find a 100 bagger, it’s more important to know what not to buy than what to buy.
You have to train your mind to look for companies that are small in size but can become big in future.
Avoid Bad industries
These industries have poor return on capital: Airline industry, paper and forestry, gold mining, communication equipment. .
High gross margin is an important indicator of good industry.
Tell tell sign of multi baggers
A rapid increase in sales, rising profits and a rising ROE.
Note:ROE should be increasing every year
When you see a 100-bagger, you will usually see an explosive growth in sales.
Prefer to pay a healthy price for a fast-growing, high-return business than a cheap price for a mediocre business.
PEG <1
Anything too far above 1x could be expensive.
The PEG ratio is simply the (P/E Ratio)/(Annual EPS Growth Rate). If earnings grow 20%, for example, then a P/E of 20 is justified.
High ROC and ROR – a desired quality
In long term, return of stock meets the return of equity.
Look for companies that earn ROEs of 20 percent or better.
“So when you see a company that has an ROE of 20 percent year after year, somebody is taking the profit at the end of the year and recycling back in the business so that ROE can stay right where it is.”
High ROE and top line – nitro booster
Three ways to raise money
They also have three ways to raise money: issue stock, issue debt or tap the cash flow of the business.
Story of Teledyne
Take Henry Singleton of Teledyne. He avoided paying dividends. He ignored reported earnings, focusing on cash flow. He bought back 90 percent of share over time. If you had put $1 with Singleton in 1963, you’d have had $180 when he retired in 1990.
Bet big on your best idea
Better to own fewer stocks and more of your very best ideas than diversify across many stocks.
Buyback a driver for 100 bagger
accelerant when done properly. A buyback is when a company buys back its own stock. As a company buys back shares, its future earnings, dividends and assets concentrate in the hands of an ever-shrinking shareholder base. Teledyne is a good example.
Moats – A hundred bagger recipe
Brand: You have a strong brand.
Switching cost: It costs a lot to switch.
Network effect: You enjoy network effects.
Lowest cost – You do something cheaper than everybody else.
Big size: You are the biggest. This gets to some inherent advantages
Don’t measure against S&P
Avoid what you don’t understand
Independent thinking
Note how the consensus never gets the extremes. The consensus always forecasts a middle ground.
The price of a stock varies inversely with the thickness of its research file. The best ideas are the simplest.
What won’t work – high P/E, goes out of business, massive dilution.
High entry P/E can stop you from getting a 100 bagger
Avoid company with a lot of debt – can go out of business.
Avoid companies where shareholder values are being diluted by issuance of shares.
Avoid mediocre opportunities
You can buy many small fish, or you can buy one big fish.
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