100 to 1 by Thomas W. Phelps summary

August 30, 2022

Few ask too much from their investing – have high goals for your returns
look for stocks that professional managers like, but are not sure of
Take 13F direct investing list and make that universe – take the most appealing and do deep dives to truly understand
Unless a company that is operating in a foreign country is conducting itself so that people of that country are better off net, after the company has realised its profit, than they would be if they had nationalised it and ran it themselves, the company is living on borrowed time.
Who is talking often more important than what is being said – never forget that people whose self-interest is diametrically opposed to your own are trying to persuade you to act every day. Try to identify people whose interests correspond with yours
Don’t have to buy small, murky stocks near the bottom to get a 100 bagger (IBM, Pfizer…)
Often more profitable to ignore the market and focus on stock selection
More important to be right than quick
Focus only on multi-bagger ideas, ignore the 100% profit opportunities.
When any rule / formula substitutes thought, discard it
For new investments, must ask, “what are my chances of making 100 for one from here?”
- History is of no help, only correct assumptions about the future are relevant
Ignore opinions but look at assumptions, nobody knows the future
The business of the stock market is to cash in on the future now
Human nature one of the few constants in an ever changing world
Shooting where the rabbit was is one of the most common investing errors
The fact without the truth is false. Always connect
Technical work only meant to supplement fundamental analysis – don’t rely on for when to trade
The greatest gains in the market have been made by simultaneous increase of earnings along with increase in PE
Relative multipliers measure expectations of a particular stock
Do not let your memory trump your reason
- Actually people did believe twenty-five years ago that interest rates would be permanently low. Why else would they have bought long-term bonds to yield 2-1/2 percent or less? … After such a prolonged decline people who confuse memory with reasoning, as most of us do, are sure interest rates will never rise again.
Buying power of a dollar is a measure of value, not a determinant
4 categories with most 100 baggers
- Advance primarily due to recovery from extremely depressed prices, rock bottom economic cycles
- Advance primarily due to change in supply-demand ratio for a basic commodity, reflected in a sharply higher commodity price.
- Advance primarily due to great leverage in capital structure in long periods of expanding business and inflation
- Advance primarily due to the arithmetical result of reinvesting earnings at substantially higher than average rates of return on invested capital
By the time the need / opportunity is clear it is already reflected in the price
None sold at a high P/E when right time to buy – got earnings and multiplier gains working for them
Good measure of success is calculating ratio of brokerage commission – net capital gain; both realized and unrealized
Every sale should be seen as admitting an error, a missed opportunity
Most important questions to answer when investing
- How much will what I expect to happen increase the status quo value of the property I am thinking of buying?
- How long will this take?
- What is the present worth of the increase I expect?
- How much of the expected value increase is already in the price I shall have to pay?
- Is there enough difference between the value increase I expect and the expected increase I have to pay for now to give me a profit I am right and a margin for error if I am wrong
Nothing is cheaper or dear, except in relation to what we get for our money
What mathematics cannot do, common sense often can
The notion that cash is safe and stocks are unsafe is a fallacy. Inflation loss is real.
Another fallacy is that avoidance of risk is more important that seizure of opportunity. Opportunity can reward you 100 fold, risk on the other hand can only make you loose 1x of your capital.
Just as fastening a seatbelt can save your life, scrupulous attentions to the change in quality of earnings can save you your fortune
Technical analysis is not an alternative to fundamental analysis, it is at most to be used as a tool for an entry and an exit after a finalised decision to buy or sell.
Rather than current ratios, use statistics to back up vision and foresight. Do your research and have faith in it.
There are 3 approaches to investing
- Psychological
- Statistical
- Spiritual
Never for a non-investment reason should one take an investment action. Such as:
- My stock is too high.
- I need the realized capital gain to offset a capital loss.
- My stock is not moving. Others are
- New management.
- I cannot or will not pump up more money to meet my margin call.
- New competition.
- I have already made 100 times profit.
Even if one’s information is complete and accurate, it can still be misleading investment wise if it is late.
When a stock persistently fails to act the way it should on the basis of the information I have, I conclude that I am missing something and redouble my efforts to find out what it is
When any rule, formula, or program becomes a substitute for thought rather than an aid to thinking, it is dangerous and should be discarded.

CONSISTENT HIGH ROE/ROCE

It’s so important it’s worth repeating again: you need a business with a high return on capital with the ability to reinvest and earn that high return on capital for years and years.
Consider a business with $100 invested in it. Say it earns a 20 percent return on its capital in one year. A 20 percent return implies $20 in earnings. But the key to a really great idea would be a business that could then take that $20 and reinvest it alongside the original $100 and earn a 20 percent return again and again and again.
Charlie Munger, vice chairman of Berkshire Hathaway said, Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.
It’s not the ROE only factor because high-ROE companies can still be lousy investments .

REINVESTMENT+CONSISTENT HIGH ROE/ROCE

I would instead emphasize looking for high returns on capital and the ability to reinvest and produce high returns for years and years
However, we should prefer a company that can reinvest all of its earnings at a high clip. If it pays a dividend, that’s less capital that it has to reinvest. And that reduces the rate of return
Consistent ROE shows management’s skill to reinvest as explained below
- Say we have a business with $100 million in equity, and we make a $20 million profit. That’s a 20 percent ROE. There is no dividend. If we took that $20 million at the end of the year and just put it in the bank, we’d earn, say, 2 percent interest on that money. But the rest of the business would continue to earn a 20 percent ROE. “That 20 percent ROE will actually come down to about 17 percent in the first year and then 15 percent as the cash earning a 2 percent return blends in with the business earning a 20 percent return,”
- “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.”
A lot of people don’t appreciate how important the ability to reinvest those profits and earn a high ROE is.
Jason told me when he talks to management, this is the main thing he wants to talk about: How are you investing the cash the business generates
The ROE doesn’t have to be a straight line. Jason used the example of Schlumberger, an oil-and-gas-services firm. He’ll use what he calls “through-the-cycle ROE.” If in an off year ROE is 10 percent, and in a good year it’s 30 percent, then that counts as a 20 percent average. “I’m comfortable buying that kind of stock,” Jason said,

DONT FOCUS FOR SMALL GAINS ONLY FOCUS FOR 100 BAGGERS

5 reasons why going for 100 bagger not as risky as aiming for lower returns
- Always a market for the best of anything – people will always pay up for quality … That is as true of stocks and bonds as it is of real estate and antiques.
- Buying for max long-term growth avoids the pitfall of underestimating other people
- When you buy a stock with a superior profit margin, an above-average rate of return on invested capital, and sales that are growing faster than the industry’s or the country as a whole, you have time on your side.
- In real life anyone smart enough to make a better mouse trap would not stop there
- Don’t buy a stock in hope that it will change, buy if you love it the way it is. “Don’t marry a man to reform him,” a wise mother counselled her daughter. It is seldom profitable to marry a stock to reform it either.
You have to Look for multibaggers only (Dont focus momentum stocks for small gain)
So, rule number one for finding 100-baggers is that you have to look for them—and that means you don’t bother playing the game for eighths and quarters, as the saying goes.
Don’t waste limited mental bandwidth on stocks that might pay a good yield or that might rise 30 percent or 50 percent.
You only have so much time and so many resources to devote to stock research. Focus your efforts on the big game: The elephants. The 100-baggers.

GROWTH, GROWTH AND MORE GROWTH

Sales Growth > 10%
If you have a company with tons of cash flow but top-line [sales] growth is 5% or less, the stock doesn’t go anywhere,” he said.
Jason is reluctant to buy a high-ROE company where the top line isn’t at least 10 percent. But when he finds a good one, he bets big.
If a company generates a lot of extra sales by cutting its prices and driving down its return on equity, that may not be the kind of growth you’re looking for
What makes a stock grow
- Reinvesting earnings at a constant or rising rate of return on invested capital, above the average of around 9%
- Investing borrowed money to earn more than the cost of borrowing
- Acquiring other companies by exchange of stock at lower P/E ratios for companies acquired than for the company acquiring them
- Increasing sales without having to increase invested capital – companies operating far below capacity, new methods, increasing efficiency
- Discoveries of natural resources
- New inventions, processes, or formulas for filling human needs not previously met, doing essential old jobs better, faster and/or cheaper
- Contracts to operate facilities for others, usually governments
- Rising P/E Ratios
Where to look for 100 baggers
- Inventions which enable us to do things we have always wanted to do but could never do before (cars, airplane, TV, computer)
- New methods of new equipment for doing things we long have had to do but doing them easier, faster, or at less cost than before. Computers, earth moving machinery
- Processes or equipment to improve or maintain the quality of a service while reducing or eliminating the labor required to provide it (disposable syringes, frozen food, copiers by Xerox)
- New and cheaper sources of energy such as oil replacing coal, keronsne, atomic generated electricity
- New methods of doing essential old jobs with less or no ecological damage
- Improved methods or equipment for recycling the materials, including water, required by civilized man instead of making mountains of waste and oceans of sewage
- New methods or equipment for delivering the morning newspapers…
- New methods or equipment for transporting people and goods on land without wheels
4 criteria for fast growing companies
- Small, sheer size militates against great growth
- Relatively unknown (popular growth stocks are very likely to perform, but one has to pay for expected growth too much in advance)
- Unique product that would do an essential job better, cheaper, and/or faster than before, or provide a new service with prospects of great and long-continued sales increases
- It must have a strong, progressive, research-minded management

SHORT TERM EARNING FLUCTUATIONS V/S LONG TERM EARNING POWER

Know business and differentiate short term earning fluctuation from earning power.
You may miss 100 baggers if u dislike short term fluctuation with intact fundaments
Don’t get lost following earnings per share on a quarterly basis. Even one year may not be long enough to judge. It is more important to think about earnings power. A company can report a fall in earnings, but its longer-term earnings power could be unaffected
Earnings power – competitive strength (like pricing power) and is what really matters
- Two most important questions in buying great companies – how high and strong is the company’s moat; how good are the prospects for sales growth?
- It is reflected in above-average rates of return on invested capital, above-average profit margins on sales, above-average rates of sales growth.
Understand the difference between earning and earning power.
- Sales growth
- Profit Margins
- RoE
- RoCE
- Book value build up
Failure to distinguish between short term earnings fluctuations and basic changes in earnings power accounts for much over trading, [and] many lost opportunities to make 100 for one in the stock market.”
So, how do you separate the ephemeral (short term) earnings setback from the real thing? Well, there is no substitute for knowing the business you’ve invested in. If you don’t understand what you own, it’s impossible to make a wise choice
That fundamental hasn’t changed. All that’s changed is a temporary dip in earnings because of a cyclical change in fortunes in its customer base. There is no new competitive threat. There was no management change. There is no new regulation or other factor that might change this business in any significant way.
This is the kind of thinking I do. As you can tell, you can only do this if you know the business well. Spend less time reading economic forecasters and stock market prognosticators, and spend more time on understanding what you own. If you’re not willing to do it, then you’re not going to net a 100-bagger or anything close to it.
In order to get a 100 bagger in 40 years means a CAGR of 12.2%. The rates of increase required to multiply a stock’s value by 100 in fewer years than forty are these:
- 35 years – 14%
- 30 years – 16.6%
- 25 years – 20%
- 20 years – 26%
- 15 years – 36%
When you say good stock, most people think of earnings, but the company can also have assets that are earning nothing at the moment. Great assets are potential earning power.
Secret to success in 100 to 1 is to focus on earning power and not price
Buy a good stock (earnings, good assets that people don’t think will earn) when nobody likes it

LOWER MULTIPLE PREFERRED

You shouldn’t go dumpster(rubbish container) diving if you want to turn up 100-baggers.
Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs, as you’d expect.
It is rare to get a truly great business at dirt-cheap prices.
If you spend your time trolling stocks with price–earnings ratios of five or trading at deep discounts to book value or the like, you’re hunting in the wrong fields—at least as far as 100-baggers go.
I say lower multiples “preferred” because you can’t draw hard rules about any of this stuff. There are times when even 50 times earnings is a bargain. You have to balance the price you pay against other factors.
One way to look at it is by using something called the PEG ratio,” Goodman suggests. “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. Anything too far above 1x could be too expensive.”
Don’t overpay for growth
It might seem with 100-baggers that you don’t have to worry about the price you pay. But a simple mental experiment shows this isn’t quite right.
Truly big return comes when you have both earnings growth and a rising multiple. Ideally, you’d have both working for you. I call these two factors—growth in earnings and a higher multiple on those earnings—the “twin engines” of 100-baggers
P/E at time of purchase very important
PE vs simple earnings increase
- For a stock to grow 100 times on increased earnings if the PE is same.
- If a PE grew 4x, the company would only have to increase earnings 25x.
- The same is also a double edged sword when PE falls, in fact it is much worse as if the PE halves, the earnings have to double just to keep the prices constant.
Fallacies in using the PE independently:
- Earnings are not as easily comparable as prices. In many ways purely comparing earnings is like comparing cows vs horses.
- Quality and composition of earnings are vital in drawing effective comparisons by using the PE.
- Just PE can be as deceptive as drinking martinis
Can’t compare P/E or relative P/E between different sectors

MOATS

In the overwhelming number of cases, a company needs to do something well for a very long time if it is to become a 100-bagger.
So, what signs can we look for in a business that it has what it takes to run for 20 years? This gets us to the topic of moats
A moat is what protects a business from its competitors.
company with a moat can sustain high returns for longer than one without.
- You have a strong brand
- Technology moat
- low cost production
- You enjoy network effects.
- It costs a lot to switch
- Entry barrier
- Biggest company in small market
Look for financial statements. Specifically, the higher the gross margin relative to the competitors, the better.
Moat, even a narrow moat, is a necessity for 100 baggers
It is vitally important that the high rate of return be protected by a “gate” making entry into the business difficult if not impossible. .. Just be sure the gate is strong and high.

SMALLER COMPANIES PREFERRED ( < 100 million revenue)

The median sales of 100 baggers companies @ $170 million
On the other hand, you shouldn’t assume you need to dive into microcaps and buy 25-cent stocks. It is not like you have to search microcaps for 100 baggers
As a general rule, I suggest focusing on companies with market caps of less than $1 billion.
Not a necessity (remember, smaller companies “preferred”), but staying below such a deck will make for a more fruitful search than staying above it.
Small companies can grow to 10 times or 20 times and still be small. They can even become 100-baggers
Must consider future size / revenues of potential 100 bagger
- 20% compounded over 50 years, a company must be 9,100 times as big at the end of the period as at the beginning
  - If you project that kind of growth for a company with $100 million of annual sales in 1980s, you must expect those sales to reach $910 billion annually by 2021.
- Must evaluate the competitive status of the company not as it is today but as it will be six to eight years from now, when it is three or four times bigger
- A large factor is also the current size of the company
- When you pay for a stock you are not only paying for average growth, but more importantly for superior growth over the future. Therefore you have to evaluate the company in a size 5-6 times its current size, after 6-8 years and check if it still makes sense.
Low-priced stocks, like the poor, are always with us.

MANAGEMENT

“In the ultimate analysis, it is the management alone which is the 100x alchemist,” they concluded. “And it is to those who have mastered the art of evaluating the alchemist that the stock market rewards with gold.”
Investing with top entrepreneurs and owner-operators gives you a big edge. And when you mix that talent with the other elements, you are on your way to big returns, if not 100-baggerdom
investing with companies that have high insider ownership. I think it brings the alignment with shareholders closer together.
Basic economic principals
- All market value is in the mind.
- All laws made by men, can be changed by men, will be changed by men as soon as people decide that they would be better off if the laws are changed.
- No one’s title or right to property is worth anymore than his fellow creatures willingness to defend it.
- If a company seems to be operating in ignorance or defiance of these 3 principles, don’t stop and figure – RUN.
Ask yourself if the company you plan to invest into is going to make the world a better place. If no, avoid it like the plague.
Ethical approach – never do business unless trust the other party. Is the company really improving people’s lives?
- Like attracts like, easy to “dress up a pig”
- Know-how is a competition reducer – the longer it takes to learn how to do what your company is doing, the fewer competitors will be around to do it for less. Diligence and integrity also vital
- Beware egonomics and an aging business getting comfortable / complacent
The moral cancer thus introduced cannot be extirpated simply by removing the evil genius at the top. It may take a generation under a good management to purge the organization of the unprincipled sharp-shooter brought in by a bad management. Hence it is unwise to look for a quick turnaround in an organization whose management has demonstrated a lack of moral principle.
investing more and more is just a people business and that management is critically important for a couple of reasons.
- One of my favorite Buffett quotes is the one where he talks about a CEO who is on a job for 10 years and he’s allocating 10% of the profits so whatever, it comes to an enormous number that that CEO is responsible for allocating that capital. That’s very important and has a big impact on returns. The honesty of management, if there’s any question about management, if there’s anything in their history that gives you pause, I would not mess with it because the market’s always going to test you.
- Management’s definitely very, very important. I spent a lot of time trying to evaluate the track record there and the integrity of the people involved.
Families are generally a positive when there’s large family ownership in the business. There’s empirical research on this too that families, in general, are good stewards of capital because they tend to be less levered and less aggressive. They are more willing to invest long-term and not play the quarterly earnings game.
- A lot of times in broader history, families transitions don’t really go so well but there are always exceptions. For example, John Elkann of Exor, who has shown he’s a pretty good capital allocator, a pretty good manager, and he was groomed for that role very young. I think that’s one way to look at it is to say, “Has this person been involved in the business when they were very young? What kind of training did they receive?”
- how did they treat minority shareholders in the past

OWNER OPERATORS PREFERRED

You invest your money in the same securities the people who control the business own. What’s good for them is good for you. And vice versa
I say the best thing to do is invest with management teams that own a lot of stock.
People with their own wealth at risk make better decisions as a group than those who are hired guns. The end result is that shareholders do better with these owner-operated firms

SEARCH AND VALUATION STRATEGY

Early on, I relied on reported numbers and I screened for statistical cheapness. I’d look for low P/E stocks, for example.Everyone can see these numbers. Yet, these methods can still work well.
Over time, however, I’ve learned that knowing what the numbers don’t show is worth more than any statistic.
Ideas can come from anywhere. But my best ideas often come from people.
Hidden stories exist. And there is a person, somewhere, who knows that story.
Make an effort to find those people and their stories
Bet on individuals and organisations fired by the zeal to meet human wants and needs, imbued with enthusiasm over solving mankind’s problems. Not just ones that are there for the profit.
The corporate economist thinks of making the company bigger than more profitable. When you see a company delivering a low return on capital and continuing capital expenditure year on year to improve market share – you probably are dealing with a corporate economist.
Usually the market pays what you might call an entertainment tax, a premium, for stocks with an exciting story. So boring stocks sell at a discount. Buy enough of them
AVOID HOT SECTORS
- Avoid the hot sectors of whatever market you’re in.
- That’s where promoters and shysters go because that’s where they can get the biggest bang for the buck. The sector is rife with fraud.
DO ENOUGH RESEARCH
- When someone tells me they can’t find anything worth buying in this market, they are just not looking hard enough. With 10,000 securities today, even one-half of 1 percent is 50 names. Kind of makes you think, doesn’t it?
SIMPLEST IS BEST
- The best ideas are often the simplest.
- The price of a stock varies inversely with the thickness of its research file. The fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those that appreciate the most
- Peter Lynch comes to mind: “Never invest in any idea you can’t illustrate with a crayon
DIVERSIFICATION
- Whatever study u have done, sometime luck may be against you
- So diversify in 10 to 20 stocks
- Being right too soon just as painful as being wrong
- Excessive diversification dodges rather than solves the investment problem.
DONT CHASE RETURNS
- Don’t try to chase returns, because doing so will cost you a lot of money over time
- There really isn’t anything intelligent to say about returns over months or year
- Besides, who cares about one year? You have to play the long game… There are approaches and investors who have beaten the market by a solid margin over time… The thing is, they seldom beat the market consistently
- The best investors lag the market 30–40 percent of the time
- None in the superstar investor group always beat the S&P 500 probably because no one thought that was the primary objective.”
- As I say, there are ways to beat the market over time. But none of these approaches always beats the market. Even the best lag it, and often.
- As an individual, though, you have a great advantage in that you can ignore the benchmark chasing.
- Keep that in mind before you reshuffle your portfolio after looking at year-end results. Don’t chase returns! And don’t measure yourself against the S&P 500 or any other benchmark. Just focus on trying to buy right and hold on
- Invest like a Dealmaker.
- Most people chase returns. As an example, consider one of my favorite studies of all time, by Dalbar. It showed that the average mutual fund earned a return of 13.8 percent per year over the length of the study. Yet the average investor in those funds earned just 7 percent. Why? Because they took their money out after funds did poorly and put it back in after they had done well. Investors were constantly chasing returns
DO IGNORE FORECASTERS
- One large study covered nearly 95,000 consensus estimates from more than two decades. It found the average estimate was off by more than 40 percent
- David Dreman writes about this in his book Contrarian Investment Strategies. Digging deeper, he finds the analysts made consistent errors in one direction: they were too optimistic
- So if you put the two together, you quickly come to realize the odds of you owning a stock that doesn’t suffer a negative earnings surprise is pretty small.
- Many people spend a great deal of time trying to guess where the economy or the stock market is going. And yet, there are countless studies that show the folly of such forecasting
- They have missed every recession in the last four decades
IGNORE MACRO
- There is a world of noise out there. The financial media is particularly bad. Every day, something important happens, or so they would have you believe.
  - They narrate every twist in the market.
  - They cover every Fed meeting.
  - They document the endless stream of economic data and reports.
  - They give a platform for an unending parade of pundits.
  - Everybody wants to try to call the market, or
  - They predict where interest rates will go or
  - They predict the price of oil or whatever.
MARKET CRASH-HUGE OPPORTUNITY
- 2008 like disasters create “easier” opportunities to make hundredfold returns
avoid companies with lots of debt.
avoid companies that are really deeply cyclical. I’m not going to be interested in say mining companies, or I’m not going to spend a lot of time looking at tanker stocks, or these heavy industrial, very cyclical names where you look at their performance over the last 10 years. I’m not going to invest in say little biotech names with one or two drugs,
I don’t have a skill set in that area so that’s easy to kill.
There are a lot of businesses that are not really that good they’re just mediocre. When you see businesses their return on assets is low single digits, the only way they get into a double-digit return on equity is they’re using a lot of debt. Businesses that don’t really have much of competitive advantage for there are lots of competitors and it’s nothing particularly special about it.
if there’s any whiff of that there might be some fraud or any whiff that there are accounting issues, I stay away from those, overly complicated things.
Additionally, I’ve been reluctant to get involved with roll-ups, where these companies do a lot of acquisitions but I’ve changed that recently. As I wrote down the blog, there are some companies that have been very skilled at acquiring lots of companies, Constellation Software is one that I’ve written about I do not own. HEICO, of course, is another skill acquired. Brown & Brown is an insurance broker that I own, has proven to be a very good acquisition over a long period of time.
- check if a company is earning a pretty stable return on invested capital over that time (last 10 years), or look at some return metrics ROA, ROE, ROI, CEOs
- companies constantly writing down those acquisitions and three or four years later, they’re writing them down. This company is probably not doing a good job on acquisitions
- company that’s doing a lot of acquisitions and over time you see slow degradation in returns on capital, that would also be a sign that they’re not doing such a good job.
if a full position is something around eight or nine or 10. Say between eight and nine. Then I might start something around three or four and then quickly get it to three or four.
- some money managers who just like to even take very small positions maybe 1% or 2% just because they know that now they own it, it raises their awareness to another level

DIVIDENDS

Don’t scoff at dividends when you are looking at capital gains as, the route through highest capital gains is often though valuation based on dividends.
When a company pays a dividend, it has that much less capital to reinvest. Instead, you have it in your pocket—after paying taxes. Ideally, you want to find a company that can reinvest those dollars at a high rate of ROE . You wind up with a bigger pile at the end of the day and pay less in taxes
If the company had paid dividends, the story would be quite different. Say it paid out one-third of its earnings. It would then take 15 years to quadruple its capital, not 10. And in 33 years, it would be up 23-fold, instead of being a 100-bagger.
Obviously,” Phelps concludes, “dividends are an expensive luxury for an investor seeking maximum growth. If you must have income, don’t expect your financial doctor to match the capital gains that might have been obtainable without dividends. When you buy a cow to milk, don’t plan to race her against your neighbor’s horse.”

BUYBACK

When you find a company that drives its shares outstanding lower over time and seems to have a knack for buying at good prices, you should take a deeper look. You may have found a candidate for a 100-bagger
In a slow- to no-growth economy, this tactic is becoming a more important driver of earnings-per share growth.
Buyback criteria
- Company should have available funds—cash plus sensible borrowing capacity—beyond the near-term needs of the business and
- second, finds its stock selling in the market below its intrinsic value, conservatively calculated.

HOLD STOCK FOR LONG TERM

To net a 100-bagger, you need to hang onto a quality stock for a number of years
A more likely journey will take 20–25 years for 100 baggers
If you buy a stock that returns about 20 percent annually for 25 years, you’ll get your 100-bagger. But if you sell in year 20, you’ll get “only” about 40 to 1—before taxes. The last five years will more than double your overall return (assuming the annual return is constant). So, you must wait. This is not to discourage you. You can earn great returns in less than 20 years. But I want to get you to think big.
BUY BUT DONT FORGET
- Phleps do not recommend putting them away and forgetting them
- Peter lynch also recommends holding stocks until fundaments deteriorate
- Check your investment thesis at regular interval
- What if you don’t get a hundredfold return? The point of Phelps’s brilliant teaching method is to focus your attention on the power of compounding until fundaments are intact. After all, even if you catch part of a 100-bagger, the returns could fund a retirement.
- Buy right and hold on does not equal buy and forget – eternal vigilance
Time is an often overlooked element in value
The investor, dedicated to buying right and holding on, picks managements, products, and processes he thinks able to cope with the unforeseeable as it hoves into view.
Except to learn from experience, one should never waste time looking back
Fortunes are made by buying right and holding on
Stay with your most successful stock investments as long as the companies are increasing their earnings
EVERYMAN’S APPROACH
- JUST HOLD ON GOOD QUALITY STOCKS IS EVERYMAN’S REPLICABLE APPROACH .
- Very few people are successful traders while there is long list of successful investors
- In the markets, you can find all kinds of crazy success stories, such as the improbable traders of Market Wizards fame—including Jim Rogers,
- Paul Tudor Jones and Michael Steinhardt—. These never interested me, for many reasons, but one big reason is they struck me as freakish. The gains were enormous, but the process was not replicable—certainly not by the everyman.
- You’ve also seen how ordinary people can achieve the lofty returns of 100-bagger dom by simply holding onto good stocks. You don’t have to have an MBA or work at a hedge fund.
- It seems so simple, but few actually ever achieve it by holding for years
- To make money in stocks, you need to have vision to see them, courage to buy them and patience to hold them. Patience is the rarest of the three.
DIGEST VOLATILITY (UPS N DOWNS)
- The biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.
- The problem isn’t only that we’re impatient. It’s that the ride is not often easy
- Netflix, which has been a 60-bagger since 2002, lost 25 percent of its value in a single day—four times! On its worst day, it fell 41 percent. And there was a four-month stretch where it dropped 80 percent
- Apple from its IPO in 1980 through 2012 was a 225-bagger. But… Those who held on had to suffer through a peak-to-trough loss of 80 percent—twice! The big move from 2008 came after a 60 percent drawdown. And there were several 40 percent drops. Many big winners suffered similar awful losses along the way
COFFEE CAN PORTFOLIO
- You take some portion of your money and create a “coffee-can portfolio.” What you put in it, you commit to holding for 10 years. That’s it. At the end of 10 years, you see what you have. Coffee-can experience says you will have found at least one big winner in there.
- Of course, investing in the buy-and-hold manner means sometimes you will be hit with a nasty loss.
- But that is why you own a portfolio of stocks. To me, investing in stocks is interesting only because you can make so much on a single stock
- Coffee-can theory says you’ll have done better this way than if you had tried to more actively manage your stocks.
- Knowing this, you need to find a way to defeat your own worst instincts—the impatience, the need for “action,” the powerful feeling that you need to “do something.” To defeat this baleful tendency, I offer you the coffee can as a crutch.
- portfolio construction with maybe 10 to 12 names somewhere between 8% and 10% each on cost.
  - no more than 10% of the portfolio in any one position on a cost basis
  - avoid to have too many connected positions for example just one hotel company or 1 oil company
  - If you really find one that’s a winner and you have to cut back on it, that’s a good problem to have. But ideally, I think you just let it ride as long as everything is in place.

WHEN TO SELL

Sometimes worth selling to get into a better stock but after taxes, etc. it has to be much, much better
YOU SHOULD BE RELUCTANT SELLER
- If you are hunting for 100-baggers, you must learn to sit on your ass. Buy right and sit tight.
So when to sell
- In his book Common Stocks and Uncommon Profits, Phil Fisher had a chapter called “When to Sell.” …If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”
- But even Fisher allows three and only three reasons to sell:
  - You’ve made a mistake in original purchase
  - The stock no longer meets your investment criteria (change in fundaments)
  - Better opportunity
- Switching is treacherous .
- Every stock that’s moving looks better than the one you’re thinking of selling. And there are always stocks that are moving.
- Investors too bite on what’s moving and can’t sit on a stock that isn’t going anywhere. They also lose patience with one that is moving against them. This causes them to make a lot of trades and never enjoy truly mammoth returns
- So in summary “If you’ve done the job right and bought a stock only after careful study, then you should be a reluctant seller”.
- DONT SELL WHEN
  - Stock price is not indication for reason to sell
  - STOCK IS TOO HIGH OR HIGH PE
    - During periods of rapid share price appreciation, stock prices can reach lofty P/E ratios. This shouldn’t necessarily discourage one from continuing to hold the stock.
  - STOCK HAS FALLEN
    - Monster Beverage became a 100-bagger in 10 years, …I count at least 10 different occasions where it fell more than 25 percent during that run. In three separate months, it lost more than 40 percent of its value. Yet if you focused on the business—and not the stock price—you would never have sold. And if you put $10,000 in that stock, you would have $1 million at the end of 10 years
  - STOCK IS GOING NO WEHERE
    - Sometimes stocks take a long time to get going. Phelps had plenty of examples of stocks that went nowhere (or down) for years but still delivered the big 100 to 1

TIMING MARKET

Mr. Lynch has taught us - ‘’Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves
Phelps also stands against market timing. He told me about how he predicted various bear markets in his career. “Yet I would have been much better off if instead of correctly forecasting a bear market, I had focused my attention through the decline on finding stocks that would turn $10,000 into a million dollars.”
Because of his bearishness, he missed opportunities that went on to deliver 100 to 1. “Bear market smoke gets in one’s eyes,” he said, and it blinds us to buying opportunities if we are too intent on market timing
Timing not too important if find the right company

DON’T GET SNOOKERED: AVOID SCAMS

MANAGEMENT
- Reading conference-call transcripts is better than listening to them (visiting them).
- In summary, it is “best to keep management at a distance.
- On Boards
  - Boards are supposed to represent shareholders, but they don’t. As Block said, there is a symbiotic relationship with CEOs. Board members often view their directorship as a perk, not a responsibility. Insurance and other protections insulate boards from liability.
  - Moreover, board investigations into misdeeds are unreliable. When boards have to investigate something, it’s like asking them to admit their own incompetence, Block said. You can’t rely on them.
- Lawyers
  - Lawyers “make it difficult for investors to make good decisions.” They represent the interests of their clients—the people who pay them—not investors.
  - “‘Prestigious’ law firms are a surprisingly effective fig leaf,” Block said. They are great at writing indecipherable prose. And the attorney–client privilege “hides innumerable acts of corporate wrongdoing.”
- Auditors
  - “Auditors are completely misunderstood,” Block said. Again, they represent the interest of their clients—the people who pay them. I’m reminded of the old saying “Whose bread I eat, his song I sing.”
  - Block talked about how it is a profession that rewards failure. Negative audits often lead to lifetime employment because the firm is fearful of being sued and wants the auditor around to help get it out of any messes.
  - Further, Block said, accounting is “a profession fighting against accountability and transparency. They [the big auditing firms] fight disclosures repeatedly. They do not want to provide investors with a better window into audits
Investment Banks
- Obviously, the investment banks have an incentive to sell financial products—stocks, bonds, and so on. They are not looking out for your interest.
- If you don’t know this by now, here it is: don’t look to research put out by investment banks or brokerage houses as a source of advice on where you should invest.
Market-Research Firms
- This one was interesting because you often see “market research” quoted from the likes of Frost & Sullivan and iResearch. Block said companies hire these firms and often give them the research to get the report they want. Market research is there to add legitimacy to management’s claims. It’s not to help you make a good decision.
- Distrust market research. Look for more objective sources of information, such as actual sales data and trends.

Suggestion for a stock screen to find potential 100-baggers:

Market cap below 500 mil$
Sales growth 15% +
EPS growth 15%+
PEG below 1
Insider ownership 10%+
ROE this year 20%+
Average ROE past 5 years 20%+
Past 5 years: ROE not below 15%
Biotech and financials excluded

Quotes

To make money in stocks, you need to have vision to see them, courage to buy them and patience to hold them. Patience is the rarest of the three.

Far more money can be made by good stock selection, than by good market timing.

A problem, well-defined is half solved.

What one buys in the stock market is 3/4 times more important that when one buys in the market.

The best safeguard against the sleigh of hand booking keeping is to have nothing to do with it or with the men who practise it.

In no civilisation has the value of currency increased, ever.

Debt is never bad. What one does with it determines the goodness or the badness of the debt.

In Alice in Wonderland one had to run fast to stand still, in the stock markets, one who stands still can really make money fast.

Not one in a thousand seriously plans and acts as one must to make a fortune

Don’t be dismayed by a loss. Recognize it as one of the costs without which you could not have net gain.

Even if one’s information is complete and accurate, it can still be misleading investment wise if it is late.

Buying right will do you little good unless you hold on. But holding on will do you little good – and may do you great harm – unless you have bought right

When a stock persistently fails to act the way it should on the basis of the information I have, I conclude that I am missing something and redouble my efforts to find out what it is

The moral cancer thus introduced cannot be extirpated simply by removing the evil genius at the top. It may take a generation under a good management to purge the organization of the unprincipled sharp-shooter brought in by a bad management. Hence it is unwise to look for a quick turnaround in an organization whose management has demonstrated a lack of moral principle.

Profits are the reward of human spirit and high endeavor – of great leadership

The practical question is not whether we should have inflation or not but how much, how fast. What does this mean to common stocks? The short answer is that inflation makes stocks rise

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

Much can never be foreseen or even imagined. The one way to benefit by it is to buy the best stock or stocks you can with no intention of selling them until they turn bad. If history is any guide, some will end up in your high bracket estate.

To buy right requires vision and courage – faith that is evidence of things not seen, things not susceptible to mathematical proof.

the stock market is a market of second-hand goods. The only reason you’re able to buy a share in a company is because somebody else didn’t want it.

You can’t feel good because it’s up, and you can’t feel bad because it’s down. You just have to focus on the business

It doesn’t really matter that much about the industry or the sector because when I did that 100-bagger research, that was one of the things that surprised me was the number of prosaic businesses that you wouldn’t necessarily expect was on there.